Consider buying shares of Oddity (ODD), as its recent -22% price drop appears disconnected from its strong financial performance and raised future guidance. The company's AI-powered, direct-to-consumer business model drives superior profit margins and customer loyalty, making it a more compelling investment than competitor ELF. ODD is growing revenue over 20% and is set to launch a new dermatology brand in the second half of the year, providing a potential future catalyst. Management also has a $103 million share buyback program in place, which could support the stock price at these lower levels. Adding a high-growth name like ODD can provide valuable diversification for portfolios concentrated in other sectors.

Oddity (ODD)

• The speaker is very bullish on ODD, especially after a recent -22% drop in its stock price.
• The drop is seen as unwarranted because the company delivered a "triple beat":
  • Beat revenue expectations (top line).
  • Beat profit expectations (bottom line).
  • Raised its full-year guidance for the third consecutive quarter.
• Business Model & Strengths:
  • AI-Powered Customization: The core brand, Il Makiage, uses AI to create custom foundation colors that perfectly match a user's skin tone.
  • Recurring Revenue: This customization creates a "sticky" customer base. Once a customer finds their perfect match, they are highly likely to continue purchasing, creating a reliable revenue stream.
  • Brand Portfolio:
    • Il Makiage: The main, highly successful makeup brand.
    • Spoiled Child: A newer skincare brand on track to become a billion-dollar brand.
    • New Dermatology Brand: A third brand is planned for the second half of the year, potentially involving prescriptions, similar to a "beauty version of HIMS."
  • Direct-to-Consumer (DTC) Focus: The company is described as a 90%+ DTC business, selling almost exclusively online. This allows it to keep higher profit margins compared to competitors who sell through retailers.
  • Strong Financials:
    • Revenue growth is projected at 23%-24% for 2025, with Q2 year-over-year growth at +26%.
    • The business is highly profitable, with an impressive EBITDA margin of nearly 29%.
    • The company has an outstanding Rule of 40 score of 55, indicating a healthy balance of growth and profitability.
• Shareholder-Friendly Actions:
  • ODD has a share buyback program with $103 million remaining.
  • The speaker speculates that management will likely use this program to buy back shares at the current lower prices.

Takeaways

• The recent -22% price drop could represent a buying opportunity, as it seems disconnected from the company's strong performance and positive outlook (beating earnings and raising guidance).
• ODD's business model appears robust, with a strong competitive advantage through its AI technology, leading to high customer loyalty and recurring revenue.
• The company's focus on a DTC model results in very high-profit margins, making it a "cash machine" compared to peers.
• The upcoming launch of a third brand in the dermatology space presents a potential new catalyst for growth.
• The active share buyback program could provide support for the stock price and increase shareholder value over time.

e.l.f. Beauty (ELF)

• The speaker also likes ELF but considers ODD to be a better investment for several reasons.
• Comparison with Oddity (ODD):
  • Business Model: A significant portion of ELF's sales come from physical retail stores like Target. This means ELF has to share its profit margins with distributors, leading to lower overall profitability than ODD.
  • Valuation & Profitability: ELF is considered about 20% more expensive than ODD based on the speaker's metrics. Its Rule of 40 score is 39, which is good but significantly lower than ODD's 55, primarily due to lower EBITDA margins.
  • Geopolitical Risk: ELF manufactures its products in China, exposing it to potential risks from China tariffs. In contrast, ODD manufactures in Europe, which is seen as a safer location from a tariff perspective.

Takeaways

• While ELF is a strong company in the beauty sector, it may face more headwinds than ODD.
• Investors should be aware of the potential impact of China tariffs on ELF's costs and margins.
• From a valuation and profitability standpoint, the speaker presents ODD as the more compelling investment opportunity between the two.

Hims & Hers (HIMS)

• HIMS is mentioned as a point of comparison for a well-liked stock that recently disappointed the speaker.
• The speaker was disappointed that HIMS did not raise its guidance in its latest report. This is contrasted with ODD, which has raised its guidance for three straight quarters.
• ODD's upcoming dermatology brand is speculated to be a "business a la HIMSS," suggesting it might adopt a similar prescription-based model for beauty or skincare treatments.

Takeaways

• The discussion highlights the importance of a "beat and raise" quarter. Companies like ODD that consistently beat expectations and raise future guidance are viewed very favorably.
• The potential for ODD to enter the prescription-based beauty market could position it to compete in a high-growth, high-margin category similar to HIMS.

Investment Themes

• Portfolio Diversification:
  • The speaker emphasizes the value of owning assets that are uncorrelated to the rest of a portfolio.
  • He owns Bitcoin proxies, which are highly correlated with each other. If Bitcoin falls, that part of the portfolio falls together.
  • The beauty sector, represented by ODD, is seen as an attractive diversifier because its performance is not tied to the health sector or cryptocurrency markets. This can lead to a more stable overall portfolio.
• Disruption of Legacy Brands:
  • Modern, DTC-focused companies like ODD and ELF are disrupting legacy giants like L'Oreal and Estee Lauder.
  • These newer companies are seen as more agile and profitable due to their high-margin business models and direct relationship with customers.

Takeaways

• Consider adding investments from the beauty sector to your portfolio for diversification, as it may be uncorrelated with tech, crypto, or other popular sectors.
• Investing in innovative, direct-to-consumer companies can be a strategy to gain exposure to the disruption of older, less efficient legacy industries.