During the COVID-19 pandemic, lockdowns and restrictions have been felt across multiple industries, affecting businesses and consumers alike. Among those hurt, the worst are the salons, stylists, and retailers that support personal beauty care. The closing of salons meant no appointments, and no appointments meant consumers had to do for themselves what they would have gladly paid a professional to take care of in the past.
Olaplex (NASDAQ:OLPX) is a leader in professional hair care products and boasts a patented system that rebuilds hair. The company is well aware of the pandemic’s effect on the hair care product market, and with its recent initial public offering (IPO), it is looking to expand on its portfolio of products for consumers. For investors, it could be an opportunity to get in on a company with huge growth potential.
A September IPO boosts the company’s valuation
When Olaplex announced its IPO in early September, the initial share price was expected to fall between $14 and $16 per share. By the time the IPO took place on Sept. 30, the company found itself with a valuation of over $15 billion, supported by a share price that opened at $21. This was a 50% jump over the lower end of its initial range — and proceeded to climb by another 17% throughout the first day of trading. This generated $1.6 billion for its investors.
Olaplex’s president, CEO, and director is JuE Wong, who is banking on the IPO to draw attention to the company and expand its brand to consumers who take hair care very seriously. The company intends to focus primarily on shampoos and conditioners. In 2017, the market for hair care products was valued by Allied Market Research at $18 billion, and it is projected to grow at an annual compound growth rate of 4.6% to a glamorous $26 billion by 2026. The company plans to launch three or four new products through 2024 in an attempt to cash in on the growing market.
Its current distribution channels include professional salons and direct-to-consumer sales, and it owns shelf space at top specialty retailers such as Sephora, Blue Mercury, Space NK, and Nordstrom. But according to Wong, the company will need better penetration to gain more market share. It currently has only a 7% penetration at Sephora.
Competitors bring more than just products
The rise in stock price immediately after the IPO, combined with predictions of positive growth in the hair care market, looks promising, but the company faces a few challenges as it looks to expand its brand.
First, the stock is trading at a high price-to-earnings (P/E) ratio of 158. By comparison, top competitor cosmetic companies L’Oreal and Ulta Beauty trade at P/E ratios of 54 and 28, respectively, with trailing-12-months earnings per share of $1.69 and $13. Olaplex earnings are at $0.16 per share. Second, salons and retail store shelves are full of competing products. And third, the company is in the midst of a patent infringement case appeal.
This past March a U.S. court of appeals ruled in favor of L’Oreal, overturning a previous ruling and $66 million judgment that L’Oreal had infringed on Olaplex’s patent for a less damaging method of bleaching hair. The lawsuit had claimed trade secret misappropriation, breach of a nondisclosure agreement, and patent infringement against L’Oreal as a result of merger and acquisition discussions held between the two companies. In May, Olaplex announced that it will appeal the new ruling and that it believes it will be successful in proving that L’Oreal willfully infringed on Olaplex.
Building on momentum
Although the infringement case appeal will be of interest to the company and to investors, it should be noted that this is not the first time these two competitors have faced off in the courtroom. Dating back to 2016, Olaplex has claimed consistently that L’Oreal infringes on its patented system, which it touts as the only true bonding system for the damaged dyed hair that comes with bleaching and coloring.
All the while, Olaplex has continued to grow its brand and generate revenue growth. Sales in the first half of 2021 climbed significantly year over year. As of June 2021, the company earned a profit of $95 million on revenue of $270 million, representing a 170% increase in revenue over the same period of 2020. It also experienced a loss of $22 million in the first half of 2020, compared to the profit in the first half of 2021.
The company seems to be on the right path to continued growth in a robust hair healthcare market. A decision in its favor in the infringement case could provide its stock with the boost it needs to exceed the average analyst price target of $34. With a strong boost, Olaplex could reach the high target of $50, which would be a 72% gain over the current $29 share price.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.