Olaplex (OPLX) provides “luxury haircare products” and priced their IPO well above the $14-16 range at $21 and increased the size from 67M to 74M shares. The deal size comes in just over $1.5B and the market cap will be $13.6B. ($14.6B using a fully diluted share count.)
There is more marketing than science at work here (despite the management claims) but you cannot deny the incredible growth and profitability of their business – 1H21 revenues of $270M are up 171% with astonishingly high margins.
PE firm Advent International is the selling shareholder here and there are some other yellow flags like the inability of the company to defend their IP and the overwhelming array of competitors and fragmentation of this market. Compared to the competition Olaplex has excelled at getting the marketing right and covering every base from salons to specialty retail to DTC and even online channels like Amazon.
Luxury hair care products are nothing new but Olaplex has brought a more online and DTC approach than many of the other brands in this sector. Traditionally you had the “salon only” brands like Redken (owned by L’Oreal) and the mass-market varieties you’d find at your general retail and pharmacy locations. Over the years all these markets have started to overlap with most major players having products in all segments. For example, you’ll find Aveda at your local CVS but higher-end products will be sold in the retail areas of salons. Beauty-focused retail chains like Ulta Beauty (ULTA) have blurred this distinction even more by offering most high-end products in-store and online and they have their own salon in the store.
I define “luxury haircare” as products that retail for $20-40 per bottle (and up). There are at least 20 brands of shampoo and conditioner that will set you back between $60-80 for two bottles.
Olaplex aims higher with what they call “prestige hair care products” and according to their website my personalized set of products tally to $280 for a set of 10 products that are expected to last me 6-8 weeks. For me, some Pantene Pro-V (Proctor & Gamble) or similar does the job but I’m sure if I had a “stylist” they would wince at that.
High-end products appeal to people who 1) color or style their hair regularly, 2) their hair is exposed to harsh environments like sun, heat, and/or chemicals, 3) need to care about their appearance, and 4) have high disposable income. You know, people who shop at Whole Foods (AMZN).
The vastly increased use of online video meetings creates a little extra demand for skin and hair care products. It’s hard to wow people with a Gucci pantsuit or a new suit from Tom Ford if you are sitting in your home office doing video calls all day. (I wonder if hats should make a comeback?) It’s also good news for Warby Parker (WRBY).
Olaplex IPO Stock Conclusion and Valuation
I worry about the competition here. L’Oreal appears to be very well positioned here given their size and ownership of brands like Redken. They also launched and own the e-commerce hub hair.com which gives them a D2C angle they can leverage.
My other concern is the prominent use of the term “patent-protected” in their marketing efforts. It appears that their core patent around the use of Bis-aminopropyl Diglycal Dimaleate (Bis-Amino) is not valid. (See The case is Olaplex Inc. v. L’Oreal USA Inc., U.S. Court of Appeals for the Federal Circuit, No. 20-1382 for more.) They can certainly create proprietary products and market better than the other players but when a management team asserts something like this without strong validation I find it a little off-putting.
Olaplex is still a very small player in a market that’s over $70B globally and they are clearly gaining share at a rapid clip. Investors in the IPO drove the valuation up from the initial $14-16 range to the eventual pricing at $21 and subsequent trading to $24 but it’s hard to ignore the earnings potential here.
This isn’t a name we are going to focus too deeply on for now but given the profit margins, it does appear to have some upside to the $30+ range, especially as 14 investment banks come out pounding the table with forward earnings estimates and price targets based on P/E rather than P/S.
This is a very crude PFV model for OLPX and should be considered as only a rough start to building a real model. We’ll see plenty of them when the coverage begins around October 25th. Although this model shows a $32 price a more generous multiple (35x) and lower discount rate (10%) would get you to $40 easily. One can usually expect an optimistic approach from all the investment banking analysts on the deal! 😉
This is certainly a huge home run for PE firm Advent International who is the seller of the IPO shares offered and will continue to own the vast majority of the stock. They are locked up for six months per the S1 but I suspect we will see an organized secondary offering well before that date.
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