Oddity Is An Intriguing Stock
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Whenever a stock pops up on both the "Hare" and "Tortoise" side of the Green Screens, it piques my interest. This means that the company is exhibiting signs of both rapid revenue growth AND substantial free cash flow generation. That's a dynamite combo for investment potential!
One recent such case is Oddity Tech (ODD), a company which IPO'd a little over a year ago. After digging in a little to the company's business characteristics - I'm intrigued! I think this is one that has a chance to deliver some good returns going forward. So let's do a deep dive and see if ODD is a buy right now.
Nothing ODD About The Business
Cutting through all the business pitch fluff, Oddity at its core is a direct-to-consumer (DTC), online-only cosmetics and beauty products company. Currently, the firm operates two brands:
Il Makiage: A full-line cosmetics brand that sells everything from lipstick, foundation, blush, mascara, eye liner, and so forth.
SpoiledChild: A beauty and anti-aging products brand, selling things like wellness, skin care, and hair care items in unique, re-fillable capsule containers.
Oddity's angle is to develop a technology platform to support its DTC online model. For example, Il Makiage's website includes a ton of educational and inspirational videos from influential beauty creators. SpoiledChild has the "SpoiledBrain" tech, which uses machine learning/AI and phone camera scanning to provide product suggestions for shoppers. The goal is to use novel technology to close the gap on in-store models, where customers usually go to research and sample beauty products.
Oddity has grown rapidly from its first brand launch in 2018. The firm has over 50 million customers and has grown to over $600 million in annual revenue run rate. About 80% of sales are to customers in the U.S., even though Oddity itself is an Israeli-domiciled company.
Growth and Revenue Recurrence
Oddity is a rapidly growing company. Its 3-year compound annual revenue growth rate is over 35%. The company grew sales 57% in 2013, and is on track for over 25% revenue growth in 2024.
Long-term, management aims for 20% annual revenue growth, and to scale its two existing brands to $1 billion in sales each. That goal alone would represent a 4-fold increase in current sales!
But there's a lot more than that. Oddity is currently developing 2 new product brands in-house, both of which it believes targets huge markets with the potential for substantial growth. It expects to launch these brands within the next couple of years. They represent another large growth catalyst.
Non-U.S. is another focus for growth. Currently, it represents less than 20% of sales, so there is plenty of potential there.
From a strategic viewpoint, management believes that DTC online is an underused channel in the cosmetics/beauty market. Long-term, they expect it to account for 50% of industry sales, and are positioning Oddity to take substantial share there. Considering this is one absolutely enormous category - $600 billion annually worldwide - that growth picture is pretty enticing.
What about revenue recurrence? Well, cosmetics and beauty products are short-term consumables that must be replenished regularly (at least once every few months per item). To this end, Oddity utilizes a subscription purchasing model that accounts for about half of its sales. Combine these two factors together and you come out with a reasonably recurring revenue model.
Oddity passes our revenue tests, so we move on to the next...
How Big Is The Moat?
Of all of our current stocks, Oddity reminds me the most of Hims & Hers (HIMS) - not a bad thing, as HIMS has been more than a double in 8 months!
More to the point, though, the cosmetics/beauty market is incredibly competitive. Huge store-based legacy brands like L'Oreal, Estee Lauder, or Nivea; business units of consumer products giants like Johnson & Johnson (Aveeno) or Proctor & Gamble (Olay); in-house brands from giants like Ulta Beauty; and more small specialty and online-only brands than I could begin to list here. It's a big market, with a LOT of competition, and it always will be.
The one potential moat is CONSUMER BRAND, but, with only a few years in, it's hard to assign this to either Il Makiage or SpoiledChild at this point. Oddity does not report hard retention numbers either, so it is hard to measure how sticky customers are to its brands once trying them. The only thing we have are the impressive growth numbers and the fact that about 50% of sales come from subscriptions.
Given this, I would not presume to assign Oddity any kind of a competitive moat right now. That said, one thing that can reduce the need for a powerful moat is a gigantic market, and that's certainly the case here. It is hard to top a $600 billion dollar global sales market... Oddity only needs to capture a very small portion of that to be an incredibly great investment. Just to put it into perspective, 1% market share would be ~$6 billion in annual sales... 10 times the firm's current run rate!
Management and Financials
Oddity is a slam dunk in this part of the review. It was founded by Oran Holtzman and his sister Shiran in 2013 and built up from scratch. Today, the company is a $2 billion public firm. Oran remains as CEO, with Shiran serving as director and Chief Product Officer.
It certainly seems like this sibling team will be leading the firm for a long time. Oran controls over 75% of the voting power. At only 40 years old (Shiran is even younger at 38), he should be at the helm for the next decade or more.
You folks know how much I love founder-run companies! This is another one.
Oddity is impressive financially. Usually, this kind of rapid growth comes with low profitability or a lot of debt, but neither is the case here. With a free cash flow margin approaching 20%, this is one of the more cash profitable cosmetics firms I've ever looked at (much more so than HIMS or ELF, for example). The company has no debt and a minimal amount of goodwill. It has grown organically, exactly what we want to see. Cash returns on investment are stellar at 79% over the trailing twelve months.
Risks
Without question, the biggest risk in this stock is the competitive nature of the industry. Consumers have virtually no switching costs. Oddity will always have to spend on marketing and product development to compete, and will always be challenged on pricing. New competitors come and go regularly.
The competitive challenges are particularly notable when considering that our fair value target incorporates substantial forward growth expectations. If competition prevents the company from hitting those targets (either growth or profitability based), it could very easily be a losing investment.
Conclusion
The lack of a competitive moat gives me slight pause, but the entirety of the opportunity here looks too intriguing to pass up on. Oddity has a novel strategy to be a disruptor in a massive market, and that has often been a good recipe for explosive stock returns (see Netflix, Amazon, Tesla, etc.). Certainly, I don't expect success at those scales, but a 2x, 3x, even 5x return from the current $2 billion market cap within 3-5 years is not out of the question. For perspective, ELF (another cosmetics firm) has a market cap 5x higher but a revenue run rate that's only about 2x that of ODD.
To model, I've used 20% annual growth over the next 5 years, a target free cash margin of 18%, a substantial 6% annual share dilution rate, and an 11.5% discount to model for uncertainty. This gives me a fair value target of $51.50, which is just below our threshold for a 25% margin of safety. Keep an eye on this one, we could be adding to the Buy List very soon!
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