Olaplex (OLPX) IPO: Deep Dive & How to Buy
In this post I'll analyze Olaplex's business model and explain how to buy the stock if you're a first-time investor.
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In this post, I’m going to explain:
Who Olaplex (OLPX) is and how they make their money
What catalyzed their valuation explosion over the last few years
My estimates regarding their financials in the coming year or so
My strategy for approaching this highly-anticipated IPO
If you haven’t already, watch this video I posted to TikTok breaking down some high-level thoughts.
Olaplex Holdings (OLPX):
Inspired by salons. Proven by science.
Repair. Strengthen. Protect.
What incredible slogans and taglines, right? These taglines make a lot of sense considering the company describes itself as "an innovative, science-enabled, technology-driven beauty company” in its S-1 filings.
But what does this mean exactly?
What is a ‘beauty company’?
In 2014, Olaplex disrupted the professional haircare industry by creating the bond building category. For us fellas reading, this essentially means they created a haircare product that makes your hair shiny and manageable while repairing each strand from the inside out.
Their initial 3 product offerings were sold exclusively through professional channels, such as a salon. But over the years, the company expanded their distribution strategy to now also include specialty retail (Sephora, Ulta Beauty, etc.) as well as direct to consumer.
According to the S-1, Olaplex is the #1 bond-building brand in professional haircare, the #1 haircare brand at Sephora, and the #2 brand on Amazon across their competitors regarding bond building.
In 2020, the company began developing other products for their customers to address 3 key uses:
Olaplex’s unique bone building technology can repair disulfide bonds in human hair that are destroyed through chemical, thermal, mechanical, environmental or aging processes.
As a guy, I can’t relate to this. But, I’ve read enough about this product and its “miracle” use cases to know this is the go-to treatment method for hundreds of thousands of women around the globe regarding hair health.
While watching the company’s investor relations presentation for their IPO, their CEO stated “91% of women know that they damage their hair daily..” further driving home the point of "Despite my inability to fully understand the treatment applicability of this product because I have no need to use it, countless women do understand and buy their products to treat damage.”
Maintenance & Protection:
According to Olaplex, they have strategically expanded their product line over time to create a “self-care” routine that their customers look forward to and rely upon on a daily basis.
This is where that maintenance and protection use cases come in - using that “Bond Maintenance Shampoo” as well as the “Bonding Oil” for protection.
These 7 products are everything anyone needs to treat, maintain, and protect their hair.
An interesting and exciting call out about this company’s product is that anyone can use it. Straight hair, curly hair - anyone from any demographic or background can use and benefit from this company’s products.
So how does the company make money?
Obviously they sell these products, but the more interesting side of that story is how they sell these products.
The company has developed a cohesive and synergistic distribution strategy that leverages the strengths of their channels shown above + their digital capabilities.
This distribution channel makes up ~55% of total Olaplex sales - so having strong relationships with professional hairdressers, like salons, is important for the company. These sales are championed by their No.1 and No.2 products, considering these products are only available in salons and sold to professionals for use on clients.
Again, as someone who has never had their hair treated at a salon it’s hard to wrap my head around this - but Olaplex explains this relationship further by confirming 5 of their 7 products were the best selling in their respective categories at Beauty Systems Group (BSG), a sort of salon network with over 5,000 stores selling 10,500 SKUs including Paul Mitchell, Wella, Matrix, and others.
I mean think about that - across 5,000 salons and distribution points across the globe including Spain, Germany, Chile, France, Canada, the UK and the USA - 5 out of 7 of this company’s products were the best selling in their product categories.
Speaks volume for how universally needed this product is for millions of women around the world - from all different backgrounds.
Back to the above-shown flywheel.
Specialty & DTC:
After the professional hairdresser performs a treatment on a client, the client now understands Olaplex’s creditability - supporting the specialty and direct to consumer sales channels.
35% of their customers purchase Olaplex products after being introduced to the product by their hairdresser - obviously through specialty retail or DTC.
50% of customers purchasing Olaplex products online / DTC were purchasers in specialty retail.
They tell their friends about it - their friends mention the solution / treatment to their hairdresser the next time they’re in for a coloring, and the flywheel just keeps spinning.
That first little blurb is the most important thing, in my opinion, this company has going for them - they tell their friends about it.
What catalyzed their valuation explosion over the last few years?
Over the last ~2 years or so, this company’s valuation has absolutely exploded - and for good reason.
Since the rise of social media, especially TikTok, it’s safe to say Olaplex is the #1 earned media value haircare brand - which means their customers advertise their products for them on socials vs. paying for ads.
This was shown by the hashtag #OLAPLEX having over 12.4 million posts on Instagram, and the #OLAPLEX having over 380 million views on TikTok.
To put this in perspective, that’s 2X as many a L’Oreal, 4X as many as Lululemon, 5X as many as Estee Lauder, and 16X as many as Peloton.
This is free marketing being delivered by happy customers of the products.
These posts and views catalyzed sales growth like crazy, and with higher sales and profits come higher valuations as a company.
The Financial Estimates:
So let’s talk about those higher valuations catalyzed by higher sales growth for a second and begin to think about what this means for the company on IPO day and beyond.
The company’s financial performance can be summarized as:
High top line revenue growth
Strong gross profit margins
Growing free cash flows
In 2019, the company generated $148.2 million in revenue.
In 2020, the company generated $282.3 million in revenue - representing a +90% increase in revenue year over year.
Beyond that, the company’s adj. EBITDA, or earnings before interest, taxes, depreciation, and amortization, in 2020 was $199.3 million - an increase of +98% above 2019’s $100.5 million.
Something I talk about a lot is seeing margins on more bottom lines like adjusted EBITDA and net income increasing more than revenue - it points to the management team’s efforts of increasing sales while decreasing expenses.
If you’re a little bit confused about adjusted EBITDA, think of it as the money that really goes to the business after they pay employees, marketing, buying product, etc. but obviously before paying interest on debt or yearly taxes.
As it relates to 2021:
During the first 6 months of the year, Olaplex generated $270.2 million in revenue - a +171% increase over their $99.6 million in revenue during the first six months of 2020.
Their adjusted EBITDA margin remained in-tact while growing quickly this year, hovering around 71% - or about $191.8 million in adj. EBITDA.
This growth is obviously insane and aided by the incredible traction they get on social media.
But looking toward the future, you can only lean onto specific products for so long until you need to expand into other product categories to fuel growth. Sure, I recognize that 45% of prestige haircare consumers have awareness of Olaplex compared to their peers’ 69%, but once that number does reach full awareness you need something more.
How Olaplex Intends to Grow:
First, repeat customers. This is a given - every company’s best customer is a satisfied one. It’s the lowest cost of customer acquisition and word of mouth / recommendations from these customers are a dime a dozen with this company.
Olaplex has shown they’re great at this by generating a compounded annual growth rate of +134% in sell-through sales from 2018 - 2020 in Sephora.
Next, product ambassador community through professional hairdressers. At time of writing this, Olaplex has only 100 brand advocates, but over 230,000 different hairstylists posting about them on socials - do you all see the overlap here? How easy would it be to tap into professionals already posting about them and offering some sort of incentive to continue selling or selling more?
Next, international sales. Right now, 44% of the company’s revenue is driven by sales outside of the USA. Considering everyone has hair, and it all grows and is damaged the same, I don’t know why type of sales wouldn’t accelerate as well. As the world continues to open up from pandemic-driven lockdowns, I’d imagine more and more people would also begin to care about their appearance and hair while attending formal events and gatherings.
The big one - skincare.
82% of Olaplex customers have expressed interest in an Olaplex skincare line - and 51% of these customers have confirmed they would switch out of their current skin care regimen to use Olaplex’s.
This is a massive, $160 billion total addressable market (TAM).
If Olaplex is able to meaningfully capture any part of that through leveraging their trusted brand awareness, it could mean incredible growth for this company for years to come.
Skincare and haircare go hand in hand - and if used properly while yielding strong results like Olaplex current products do - are repurchased by happy customers again and again and again.
Thinking about 2H of 2021:
On page 35 of their S-1 filing, the company states:
Our business has historically been influenced by seasonal trends common to traditional retail selling periods, and the results of our operations typically are slightly higher in the second half of the fiscal year due to increased levels of purchasing by consumers for special and holiday events and by retailers for the holiday selling seasons.
Which to me means the $270.2 million in revenue they’ve experienced during the first half of the year is likely to accelerate throughout the second half.
Last year, the second half of the year made up $183 million of the $282 million in total revenue, or a 2X that of the first half. I’m not at all going to assume anything close to that kind of acceleration this year because that would be irresponsible, but I do think we could assume a +20-30% bump in revenue compared to the first half of 2021.
2021 First 6 Months revenue actual: $270.3 million
2021 Second 6 Months revenue estimate: $337.9 million
2021 Total revenue estimate: $608.2 million
According to this report by Barrons - the company is now aiming for a $12.3 billion valuation to debut at tomorrow. This pegs the stock at $19 / share.
If we open up at $19 / share - which I think it unlikely considering the hype around this IPO (it’ll open higher), we’re assuming a ~20X FY2021 revenue multiple on the company.
This is pretty lofty considering they’re a haircare company - but given their growth levers, potential entrant into a new skincare market, and high margins, I understand why they’re being valued so much higher than L’Oreal (a company growing revenue only +7% annually).
How I’m Going to Approach the IPO:
I have a feeling Wall Street knows this company is hot among retail investors (you and I) and they’re pricing it accordingly.
Remember, Olaplex offers their stock to banks like Goldman Sachs, JP Morgan, Morgan Stanley, and Barclays to underwrite - which means buy directly from them.
Then these banks sell the shares for as much as they can on IPO day to both professional fund managers and retail investors.
Last week, Toast, a restaurant tech company made their public debut and their stock immediately popped +63% upon trading. Like instantly. Now, a week later it’s trading down -25% ($49 / share) from that initial pop, but still above their “initial price” of $40 / share.
I imagine Olaplex will see a similar future.
An aggressive pop in the first day or even the first week, some volatility for weeks to come - then either a solid move up or down when their quarterly financial earnings are released for the third quarter of 2021.
I think this company has legs. I’m excited about it, and I’m going to allocate 1-2% of my portfolio to it over a few months’ time. I’m expecting a lot of volatility both due to macro market uncertainty through the rest of the year, and since this stock so fresh and new, that will be amplified with Olaplex’s stock price.
How to Buy the IPO:
Super simple - Public.com is offering the ability to be notified the moment the stock begins trading (favorite star in the top right) then also the ability to either purchase the stock through a market order or a limit order - which really just means if you want to buy the stock for the exact price it’s trading at in that moment, or set a price you’d rather purchase it at and wait for it to hit that set price before buying.
Public is an online broker that I use to purchase shares of stock like Olaplex, as well as Peloton, Airbnb, Facebook, and Coinbase.
If you want to use a different online broker, consider referring to this website.
And there you have it! A nice little breakdown of the company and how I’ll be approaching their IPO.
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Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.