Oddity Tech Stock: Disrupting Beauty At A Fair Price (NASDAQ:ODD)

“Warren, forget about ever buying another company like Berkshire. But now that you control Berkshire, add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices.

That’s what Charlie Munger famously said to Warren Buffett. It sums up my thinking behind investing in Oddity Tech Ltd (NASDAQ:ODD). It’s a fantastic business that may not be the next large cap but, definitely, a long-term winner I can buy today at a reasonable price.

When looking at any new stock, I focus on four things.

• The Story: What does the company do, and why does it matter?

• The Business: Is it built to last, and is there room to grow?

• The Valuation: Am I getting a good deal for my investment?

• The Management: Do I trust the people in charge?

Oddity checks all the above boxes for me, and I am excited to share why I’m putting my money behind this company. Let’s dive in!

The Story: Beauty and Brains?

Oddity is an Israel-based Technology-driven beauty and wellness company that aims to disrupt the Industry with cutting-edge AI solutions. They sell direct-to-consumer (DTC) and own two major brands: IL MAKIAGE & Spoiled Child. They claim to be an AI company, are they more than just another fancy brand with cool tech? Let’s investigate.

The Old Way Vs. Oddity Way

Most big cosmetics names such as L’Oréal (OTCPK:LRLCF), Unilever (NYSE:UL), and Estée Lauder (NYSE:EL) follow a traditional distribution method. They rely on a network of retailers for distribution. These companies have strong, long-lasting relationships with department stores, pharmacies, and supermarkets. They also offer a DTC option for their consumers. However, they rely heavily on selling to retailers (B2B). This limits the valuable customer insights and experience, Oddity is different; they are DTC all the way.

Oddity’s Technology Focus

• AI-Driven Molecular Discovery: Oddity Labs uses AI to analyze vast sets of molecules, much similar to the innovative pharmaceutical companies. AI helps them discover potential new cosmetic ingredients for their products. This aims to streamline and speed up the time-consuming R&D process.

• Personalization Tool: Oddity uses imaging technology and questionnaires to understand your skin type, concerns, and goals. Then their product-matching algorithms suggest the right products for you.

• Skin’s AI Doctor (Coming Soon): Oddity is developing a mobile application that uses AI to analyze your skin and suggest solutions. It’ll also track your progress like your skin doctor.

Data Power

Because Oddity sells directly to you, they can collect and analyze consumer data such as product usage, feedback, and other metrics. This information helps them to improve the personalization tools and develop even better products in the future.

By selling directly to consumers, Oddity can control marketing, data, customer experience, and profits. Their technology-driven solutions give them an edge that’s hard for competitors to copy.

In a Nutshell

• DTC business model gives Oddity control over its marketing, data collection, customer experience & high profit margin.

• AI-driven lab and personalization tools ensure an optimized R&D process and a great customer experience.

They are not just another beauty brand; they are a beauty brand with brains.

The Business: A strong start?

Ever since its inception in 2018, Oddity has hit the ground running. They went public in 2023 and are already profitable with a positive cash flow. Oddity boasts impressive financials. As you can see below, they have been growing revenue consistently in the last three years.

Although the above quarterly revenue chart indicates growth has peaked in the first two quarters of 2023, that’s not the case. This high growth in the first two quarters is a result of their second brand, Spoiled Child and a strategic marketing push, but now Oddity is pacing itself for sustainable, long-term growth.

They have been consistently EPS positive for the past two years, with a healthy jump following the Spoiled Child launch.

Looking at the gross margin picture, it’s stable and sits comfortably around 70%. This is excellent for a new company like Oddity, we can attribute that to the DTC-only nature of the business and loyal customers.

They have also maintained net income positivity except for one quarter and a 20% EBITDA margin, all excellent signs for a young company and a growing brand. Despite the fast growth, their balance sheet looks very healthy. Cash & ST investment is rising while the current liabilities are steady. This strong balance sheet positions them well to weather any possible deterioration in consumer confidence.

The global beauty and personal care market is a massive 600B+ Industry, projected to grow at 8% CAGR over the next several years. This allows ample space for Oddity to grow its market share as the TAM continues to expand, especially with the online sector growing even faster. This bodes well for Oddity’s future.

The Valuation: Finding Fair Value

Oddity’s current valuation might seem high at first glance. But when considering their growth potential, a different perspective will emerge. Oddity appears fairly valued at a trailing P/E of 36.75 and FWD P/E of 24. This is above the sector median of 19.9 and 17.3 respectively. However, Oddity is a young and growing company, the PEG ratio (TTM) is at 0.23, and a PEG ratio close to 1 is considered fair. On that metric, Oddity appears undervalued. But the management in their Q1 earnings call insisted they would reduce the growth rate to a more sustainable 20%. This would mean the PEG FWD is around 1.2, which is a fair value.

Sentiment among the Wall Street analysts is positive for Oddity. Four out of seven analysts rate Oddity as a strong buy and none with a sell rating. The average analyst price target suggests the stock could rise by 40%.

Analysts also predict the company to grow its revenue above 20% for the next several years. This is in line with the management expectations and targeted growth rate.

The Management: Steady Hand at the Wheel

Oddity is a founder-led company with Oral Holtzman as CEO and Mrs. Shiran Holtsman-Erel as the Chief Product Officer. CFO Lindsay Drucker Mann joined the firm from Goldman Sachs, having worked as Managing Director for over 16 years.

Institutions hold a majority stake at 80% of total outstanding shares with a recent purchase by the biggest institutional investor firm Baillie Gifford, a vote of confidence in Oddity’s future. Q4 2023 they have added 300828 shares to their holding, purchased at $36.45 increasing their total stake in the company to 12.9%. This shows the current price is seen as fair from their biggest institutional investor’s perspective.

When assessing the management through their Q4 2023 earnings call, I was surprised by the maturity of the management even though the company is relatively new to the market.

In Q1 2023, I did a mistake and grew too much. We grew 83%, which led to an insane growth of 57% for the full year and we decided not to do it again, although I strongly believe we could. The goal for the long-term is, again, as we mentioned before, 20% plus and 20% EBITDA margin and by pacing the growth, I’m ensuring it will happen and will continue to be in way.

For Q1, we built the model and managed the growth to support 22% to 24% year-over-year, and I will say it again, pacing growth is my decision. But even when we are pacing the growth to 20% plus, we are going way more than my legacy competitors, which are in single digits and we are still securing the business early in the year, age one, it’s still the most important period for us. In 2023, 60% of our revenue was captured in age one, and in 2024, we expect age one to represent a very similar number to 60%. And with — but we don’t need to increase Q1 or the first half of the percentage of total in a year to do so.

The above comment from the CEO during the Q4 2023 earnings call shows despite the success of their latest brand, Spoiled Child and explosive growth in 2023, they recognize the key to long-term success is consistent growth. So they are pacing down and focusing on the long-term growth objectives. This will allow them to scale timely and ensure that consumer satisfaction is maintained.

Risk To My Thesis

Oddity is a consumer discretionary company, it is susceptible to fluctuations in consumer confidence and a broader economic trend. North America remains the largest market for Oddity, though their business model allows them to expand to other markets around the world easily. Consumer confidence in the US has shown resilience in the high-interest rate environment so far, but this doesn’t guarantee a deterioration may not occur. However, their strong balance sheet should help them weather such storms.

The beauty and wellness market is a highly competitive market, with a lot of innovative new-age companies competing for market share. Even though Oddity is well-placed with technology-backed manufacturing and product optimization, competition could intensify and hinder market share growth. It is also true that the Industry traditionally has seen many new players emerge and fail to grow market share over the long term.

Besides the above, overall macro sentiments & Israel-Hamas war impacting R&D Center operations in Tel Aviv can also push the stock value down, although I will see it as an opportunity to lower my cost basis.

Conclusion

As I conclude my analysis, Oddity appears to be a well-funded, profitable company that is well-positioned to disrupt the traditional beauty and wellness industry with its technology-driven approach. Their strong financials, founder-led leadership and focus on sustainable growth make them an attractive investment opportunity, echoing Charlie Munger’s wisdom: “It’s better to buy a wonderful business at fair value”.