Most people in this world have some desire to appear physically attractive to others. It conveys many valuable information to the world, such as the meaning of health, the meaning of self-care, etc. Today, there are a number of companies dedicated to providing beauty products. And one of them is Olaplex Holdings (NASDAQ:OLPX). The company’s recent performance has been incredibly impressive, both in terms of revenue and results. Naturally, this has resulted in significant demand for the company’s stock, with the end result being a stock price that trades at fairly high multiples. Ultimately, the company’s shares are likely at a fair price. But if growth can continue like this for the foreseeable future, that might not be a bad prospect for growth-oriented investors to consider.
A beauty salon
Reading Olaplex’s financial statements gives the impression that the company is very committed to approaching beauty from a scientific point of view. That would be true, but it also complicates what the company does. Cutting through all the rhetoric, you see that the company is dedicated to providing hair care products to its customers. These products aim not only to make the hair more beautiful, but also to make it healthier. Some of its products are dedicated to treating it, others to maintaining it and still others to protecting it. Examples include various types of shampoo and conditioner, as well as smoother and oil-based products. An image of its products can be seen below. Of course, management said the three products their platform is championed by are #1, #2, and their 4-in-1 Hydrating Mask.
Instead of selling largely directly to consumers, Olaplex generates revenue by targeting the professional hair care community. Of course, that doesn’t mean the company doesn’t sell to just anyone. They offer their products to specialty retailers and through their own direct-to-consumer channels. In the company’s 2021 fiscal year, for example, its specialty retail channel grew 247%, reaching 29% of the company’s overall revenue. Its direct-to-consumer sales grew 117%, reaching 27% of total revenue last year. But that doesn’t change the fact that most of the rest of the revenue, accounting for about 43% in total, came from its professional channel where it sells products used by hairstylists in salons and also sold directly by hairstylists to consumers. The company also has over 150 patents to its name, which also makes it a valuable intellectual property consideration.
The company’s fundamentals are largely limited to the past three years. But what a remarkable time those three years have been. In 2019, the company had revenue of $148.2 million. This amount jumped to $598.4 million in 2021. Generally speaking, when you see this type of growth, it can only be attributed to a major acquisition. But that was not the case here. Management attributed much of its revenue growth in 2021, for example, to higher volumes resulting from strong organic demand for its products, both at home and abroad. The company expanded into new countries and also launched new products. Another contributor to its expansion with the addition of new e-commerce customers. Management also has high expectations for fiscal 2022. According to the company, sales for 2022 are expected to be between $796 million and $828 million. Halfway through, that would imply revenue of $811 million. To put that into perspective, that would represent a year-over-year growth rate of 35.5%.
As revenues have increased, profitability has also increased. After seeing that revenue jump from $60.9 million in 2019 to $39.3 million in 2020, it then jumped to $220.8 million last year. Adjusted net income has been more consistent, rising from $100.5 million in 2019 to $131.1 million in 2020 before jumping to $275.7 million last year. Of course, there are other measures of profitability that investors need to consider. Operating cash flow, for example, fell from $52.6 million in 2019 to $200 million last year. And the company’s EBITDA went from $100.5 million to $408.8 million. Regarding the 2022 financial year, management provided some guidance. Net income, on an adjusted basis, is expected to be between $363 million and $379 million. The midpoint here is $371 million. Meanwhile, EBITDA is expected to be between $504 million and $526 million, with a midpoint of $515 million. Management has not provided any guidance regarding cash flow from operations. But if we assume a growth rate similar to what we should see with EBITDA, then a reading of $252 million should make sense. During that time, I expect GAAP net income to be around $297.1 million.
Taking this data, we can see that stocks are quite expensive. On a price/earnings basis, using the company’s fiscal year 2021 data, we see a trading multiple of 42.5. This drops to 31.6 based on the 2022 forecast. The adjusted multiples here would be 34.1 and 25.3, respectively. Using 2021 figures, the price to operating cash flow ratio would be 47, while the 2022 forecast would be 37.3. And the EV/EBITDA multiple would be 24.4. This compares to 19.3 if we rely on 2022 estimates.
To put it all into perspective, I decided to compare the company to five similar companies. On a price/earnings basis, using our 2021 numbers, Olaplex was more expensive than all but five companies. This was based on a price/earnings multiple ranging from a low of 18.7 to a high of 120.7. Using the price/operating cash flow approach, the range was 8.9 to 45.5. Our prospect was the most expensive of the bunch here. And using the EV to EBITDA approach, the range was 6.1 to 335.7. In this scenario, only one of the five companies was more expensive than our target.
|Company||Prizes / Earnings||Price / Operating Cash||EV / EBITDA|
|Coty Inc. (COTY)||120.7||11.5||8.2|
|Natura & Co. Holding SA (NTCO)||30.7||45.5||6.1|
|The Beauty and Health Society (SKIN)||N / A||N / A||335.7|
|Inter Parfums (IPAR)||30.2||22.0||15.3|
|Edgewell Personal Care Company (EPC)||18.7||8.9||11.0|
Based on all the data provided, I can say that Olaplex is a remarkable growth story. There is no doubt in my mind that the management is doing a fantastic job of growing the business. This strong growth certainly demands a premium. But already, stocks are starting to look rather high. The good news is that if further growth occurs, this high multiple could very well be justified. But this game should only appeal to investors who expect the strong growth to continue for several years.