We came across a bullish thesis on Olaplex Holdings, Inc. (OLPX) on Value Investing Subreddit page by SuspectSignificant26. In this article, we will summarize the bulls’ thesis on OLPX. Olaplex Holdings, Inc. (OLPX)’s share was trading at $1.82 as of Nov 5th. OLPX’s trailing and forward P/E were 26 and 12.14 respectively according to Yahoo Finance.
A customer shopping for lifestyle and beauty products at a physical store.
OLAPLEX, a prominent player in the beauty and personal care industry, is primarily focused on hair treatment solutions, a straightforward business with a clear value proposition. The company’s financials from 2021 to 2024 reflect a strong book value and healthy cash flow, despite a slight decline in recent years. However, the high price-to-earnings (P/E) and price-to-book (P/BV) ratios suggest the stock may be overvalued, with limited growth in earnings per share (EPS). One area of concern is OLAPLEX’s pre-IPO Tax Receivable Agreement (TRA), which obligates the company to pay 85% of tax savings to pre-IPO stockholders, creating an unpredictable long-term liability that fluctuates with tax benefits. In 2023, this liability amounted to $16.6 million, contributing to a total long-term liability of around $200 million. However, OLAPLEX’s liquidity, including $700 million in cash and credit lines, mitigates these risks.
Another key financial consideration is the company’s interest rate caps on a $400 million term loan, which amortizes to $200 million by 2025. This hedging strategy has helped reduce interest expenses in 2024, though it comes at the cost of premium payments. If interest rates decline, OLAPLEX’s debt costs could significantly decrease, improving its financial standing. Despite these complexities, OLAPLEX maintains a strong position with 322 trademarks and 160 patents, creating a competitive moat, especially with its proprietary Bis-amino ingredient. These patents provide unique solutions, such as protecting hair from damage caused by alkaline shampoos, distinguishing OLAPLEX products in the market.
The company’s management, largely aligned with shareholders through its ownership by Advent Funds, is focused on long-term growth and risk management. OLAPLEX has addressed challenges like consumer demand, inventory issues, and competition, while maintaining a strong brand reputation. The company has been transparent in handling lawsuits, with no findings of wrongdoing, further bolstering its brand integrity. While recent financials show some decline in sales, the core business remains stable, indicating that these are temporary setbacks rather than signs of long-term distress.
Looking ahead, OLAPLEX’s patent portfolio and market positioning suggest strong long-term growth potential. Although debt obligations and the TRA remain hurdles, they are manageable within the context of the company’s liquidity and strategic planning. As these obligations subside, OLAPLEX’s financial position should improve, providing upside for shareholders. The stock’s current underperformance, due to challenges like lawsuits and declining sales, presents a buying opportunity, as the company’s intrinsic value is likely higher than its current market price. Overall, OLAPLEX offers a compelling investment opportunity with solid fundamentals, competent management, and promising long-term prospects.
Olaplex Holdings, Inc. (OLPX) is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 18 hedge fund portfolios held OLPX at the end of the second quarter which was 19 in the previous quarter. While we acknowledge the risk and potential of OLPX as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than OLPX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.