ODDITY Tech Ltd.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

ODDITY Tech Ltd. is a consumer tech platform that focuses on the beauty and wellness market, leveraging data and technology for personalized experiences and product development, primarily known for its AI-powered beauty and wellness brand IL MAKIAGE.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: ODDITY operates as a direct-to-consumer (DTC) beauty and wellness company, primarily selling products online through its two main brands: IL MAKIAGE and SpoiledChild. IL MAKIAGE focuses on makeup and skincare products, while SpoiledChild centers around wellness, skincare and hair-care, but also including home goods and other lifestyle goods.

Revenue Distribution: The business operates on a global scale and derives most of its sales from its DTC channels (e-commerce platform), with a small portion of revenue from brick-and-mortar retail operations. The majority of ODDITY’s revenue comes from beauty products sold by IL MAKIAGE and its skincare and wellness brand, SpoiledChild. The geographic distribution of revenues is mainly North America (primarily U.S.), but they are expanding to markets in Western Europe, Israel, and Australia.

Industry Trends: The beauty and wellness market is a dynamic industry with a mix of established players and new disruptive brands. Key trends include a focus on personalization, ingredient transparency, science-backed formulations, and use of new technologies. The use of data analytics and AI to tailor and market products has become more common.

Margins: ODDITY operates at very high gross margins, approximately 65-70%, partially due to its strong brands, unique business model, and high degree of direct sales. However, operating margins are much lower than gross margins, around 10%, due to high customer acquisition costs, R&D expenses, brand building and scaling costs.

Competitive Landscape: The company competes with both established cosmetic brands like L’Oreal, Estée Lauder, and large retailers like Sephora and Ulta, and emerging digitally-focused brands. This competitive landscape is fierce and diverse, requiring innovation, effective marketing, and a strong brand to succeed.

What Makes ODDITY Different? ODDITY differentiates itself through its proprietary technology platform and its use of AI, machine learning, and data analytics. This focus enables the company to create hyper-personalized experiences and develop products with faster product cycles than traditional brands. Their business model allows for a lot of flexibility and nimbleness which are important competitive advantages.

Recent Developments ODDITY has introduced a new skin-tech brand under SpoiledChild which utilizes AI-backed skincare tools. They’re focusing on personalization, diagnostics, and skin care routines. They are rapidly expanding into offline retail channels, as well as international distribution.

Recent Concerns/Problems: The company is experiencing elevated shipping costs, due to increases in fuel, transportation, and labor rates. The company is also experiencing an increase in marketing costs needed to attract new customers. They have also incurred increased costs for technology and product development. While they have been able to increase revenue, they also had to sacrifice some of the margins to compete with current market conditions.

Financials In-Depth:

Revenues: ODDITY has consistently demonstrated high growth over the past years, reporting $560 million of revenue in 2023, a 70% increase compared to the previous year. Revenue was primarily driven by growth in its established brand, IL MAKIAGE. It’s important to note that there is a noticeable deceleration in growth of new customers in the first quarter of 2023, compared to the second half of 2022, it’s a concern that management is actively addressing. Profitability: Gross margin is exceptionally high, around 70%, however net margins are considerably lower, in the range of 7%, due to high SG&A spending. They have consistently increased their marketing and sales personnel. Despite high revenue growth, profitability hasn’t seen a similar rise and management is still finding ways to increase operating efficiency to boost overall margins.

Cash Flow: They generated $125 million in cash from operations, which is used to fund reinvestments and to pay down debt. The company is generating cash from operations, but most of that is used for investment. As of the end of the fiscal year of 2023, their cash and cash equivalents are around $119 million, which is a notable decrease from 2022 levels.

Balance Sheet: ODDITY has a reasonably healthy balance sheet. There isn’t an excess of debt and they have a growing equity portion. They have around $144 million in long term debt. Overall, they have a good mix of short-term and long-term assets, which is needed for the operational aspect of the business. They are making substantial R&D investments in new technology and software development.

Guidance ODDITY expects total revenues between $625-635 million, and EBITDA between $86-$92 million in 2023. As of Q1 2023, they believe they are well-positioned for profitable growth, although market conditions may present some challenges.

Moat: ODDITY’s moat is rated at 3/5 based on several factors:

  1. Brand Identity: They have created a strong brand especially in the beauty sector, which allows them to charge a price premium. Customers are generally loyal to their brand.
  2. Data-Driven Personalization: The use of data analytics and AI algorithms to personalize customer experiences and products creates a unique value proposition. This is very hard to replicate and is a real sustainable advantage.
  3. Technology and Innovation: The technological platform built by ODDITY allows them to create more efficient product cycles than their competitors. The company also has an incredible ability to quickly react to market demands and consumer habits. They have also filed several patents relating to their technologies.
  4. Scale: They have developed an established infrastructure for direct sales which can provide a large advantage over competitors. They also have high levels of engagement and brand loyalty, which ensures a steady customer base. However, since the brand can be affected by consumer preference or external factors like regulation and competition, their moat doesn’t rank higher. The business is also still relatively new in the industry and hence needs more time to prove a higher durability.

Legitimate Risks

  1. Increased Competition: The beauty industry is very competitive, with well-established brands and new entrants. Increased competition could potentially erode margins.
  2. Changing Customer Preferences: Trends in the beauty industry change rapidly, and if the company is slow to adapt, it could lose customers. Also, the current marketing might not be as effective in the future.
  3. Increased Advertising Costs: It is very costly to acquire new customers. Since they heavily rely on advertising to get the message out, any increase in ad costs can affect the company’s profitability.
  4. Reliance on Technology: As they are heavily relying on tech for development, innovation, and sales, technical problems, hacks, or security issues could significantly affect operations.
  5. Economic Downturn: Economic downturns, decreased consumer spending could negatively affect the demand for their products. Also, as they are still trying to expand into more countries, macroeconomic headwinds in those regions can severely impact the business as a whole.

Business Resilience

ODDITY does have very high growth potential, because of its innovative approach, strong technology, and personalized customer experiences. The company does have a relatively new product, however, they have strong brand recognition, loyal customers, and a very dedicated management that wants to move the company forward. They have also shown a capability to innovate in new areas and categories. The company is also building strong technological barriers and proprietary technology which should provide a robust infrastructure for future growth.

Understandability: 3/5 ODDITY’s business model has both simple and complex elements. On one hand, the direct-to-consumer business model and marketing strategy are easy to understand. On the other hand, the specific technology and algorithms they use are fairly complex and the data around them isn’t very well detailed. Understanding their long-term strategies can also get tricky to understand and predict, but management is trying to create as much clarity as possible with their communications.

Balance Sheet Health: 4/5 The company does have a relatively strong balance sheet, with a good amount of equity and cash as well as good reserves for liabilities. However, their cash balances have declined somewhat, and the debt-to-equity ratio has increased in recent quarters, as they seek to expand their operations.

In conclusion, ODDITY is a company with high growth potential and an innovative business model with a reasonably strong moat, but it does face quite a few challenges and risks. Understanding their technology and algorithms might also make it difficult for some investors to have clarity around how the business operates.