Women's haircare products or something more?

Olaplex is a revolutionary haircare product. Olaplex relies on science to repair, protect, and strengthen women's hair. ~100% revenue growth, 50%+ operating margins, and a long runway of growth.

I’ve spent the month of January researching Olaplex. The writing below summarizes my current perspective based on the research I’ve performed.

Section 1 - Investment Thesis

What are the driving factors behind a potential investment in Olaplex?

Section 2 - Business Model

How does Olaplex make money? What is its strategy to grow? Where will future revenue come from?

Section 3 - Sustainable Competitive Advantages

What protects Olaplex from incumbents and future competitors?

Section 4 - Management

Who decides Olaplex’s capital allocation strategy? What’s their background? What are their motivations?

Section 5 - Valuation and Financials

Is the market missing anything? Why might there be a disconnect between intrinsic value and Olaplex’s current price?

Section 6 - Risks

What are the major risk items that investors should be aware of?

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Section 1 - Investment Thesis

At first glance, Olaplex seems to be a simple DTC business selling haircare products. Under the hood, Olaplex has patents ranging from haircare to skincare and extreme brand loyalty that is still growing. This brand loyalty is being underappreciated by the rest of the market. Olaplex boasts high margins, fast revenue growth, and the potential to continue to grow at an above-average rate.

Key Thesis Points

• Strong, growing, and underappreciated brand

• Long runway of growth through numerous channels

• Asset light business with impressive margins

Section 2 - Business Model

Olaplex sells haircare products through three channels:

• Professional

  • ex. through salon channels

  • 46.4% of net sales in Q3

• Specialty Retail

  • ex. selling through retail stores such as Ulta or Sephora

  • 28.7% of net sales in Q3

• DTC

  • ex. direct to consumer through e-commerce

  • 24.9% of net sales in Q3

Olaplex has a top-down approach to building its brand. Olaplex focuses on salons and hairstylists in order to get them comfortable with using Olaplex products. Once hairstylists are comfortable with these products, they will start to use them on clients and eventually recommend them to clients.

In Olaplex’s investor presentation on page 9 (link here), recommendations from hairstylists are the leading source for choosing what hair products to use. This is logical and isn’t just Olaplex promoting their go-to-market strategy. These salon clients then shop for Olaplex products either in brick and mortar retail locations (specialty retail) or order Olaplex products online (DTC).

The professional channel is the most important to establish Olaplex’s brand and offering for future customers. Olaplex uses salons to build up the Olaplex brand. Hairdressers help “distribute” Olaplex products through their recommendations and hair treatments in salons.

Olaplex has partnerships with Sephora and Ulta that will grow brand loyalty, revenue, and profits. Olaplex was set to roll out into Ulta stores starting at the beginning of the year.

Avenues for Growth

Olaplex CFO, Eric Tiziani, stated that growth will come evenly across three different drivers. These drivers are innovation (new products), new distribution opportunities (new countries/partnerships), and just the core and increased velocity (more penetration into existing customer base).

I think the growth avenues can also be split up among the following, starting with most likely to least likely:

• Increase penetration into salons and hairstylists.

  Olaplex’s penetration into salons and hairstylists is still relatively small. In Olaplex’s Q3 2021 earnings call, JuE Wong highlighted that Olaplex’s Facebook group has around 250,000 hairstylists, but there are more than 800,000 hairstylists in the US. Olaplex needs to continue to grow its hairstylist customer base and also increase the number of products these hairstylists sell to their clients. Olaplex can expand the number of salons using Olaplex products as well as the volume of products that the average salon sells to clients.

• Expansion in international countries.

  Olaplex has room to grow in other countries despite international already accounting for 42% of revenue in Q3 2021. Management has called out Asia (more specifically China), Latin America (Mexico and Chile), Europe (UK, Spain, and Italy) as key segments for Olaplex’s future. Although it isn’t a sure thing, Olaplex has already had success in international countries and its playbook will continue to work. On top of this, management believes international revenue will grow at a slightly faster rate than US revenue.

• Expansion into adjacent categories like skincare.

  Management has said “we have patent applications that really have skincare and nailcare application” which shows their interest in expanding beyond haircare and into other segments of the beauty market. For example, Olaplex has job openings for Chemists focused on skincare. Skincare and haircare are two massive markets with incredible customer loyalty if the products work for the customers. While haircare remains the main focus, Olaplex will continue to look for ways to innovate outside of its core revenue channel of haircare products.

Section 3 - Sustainable Competitive Advantages

Olaplex is similar to many consumer companies such as Lululemon, Aritzia, Yeti, and other companies with strong brand loyalty. Research shows that many women are extremely loyal to Olaplex and wouldn’t consider switching to other products after their experience with Olaplex.

The additional advantage that Olaplex has is its portfolio of patents that prevent companies from copying their science and technology. Olaplex has sued L'Oréal already for “trade secret misappropriation, breach of a non-disclosure agreement and patent infringement.” While Olaplex won the initial ruling, an appeal overturned this victory in December 2021. Olaplex is appealing this decision. While patents are often hard to enforce, Olaplex’s combination of brand loyalty and portfolio of patents provides a strong moat to competitors.

Section 4 - Management and Capital Allocation

Management and capital allocation are the two criteria that need more time to develop for investors to get comfortable with investing in Olaplex. While yes, the management team has done an outstanding job growing Olaplex into a public company with strong revenue growth and outstanding margins, investors will need more time to develop an opinion of Olaplex’s management team.

While Olaplex’s management team may need to prove themselves in the public markets, they have great backgrounds. According to her resume, CEO JuE Wong has been recruited by numerous private equity firms to lead various companies. While this might be a biased source of information, when combined with the rest of the mosaic, it does add another data point on management.

CFO Eric Tiziani was CFO of Unilever North America according to his LinkedIn page. This is a good signal. A young executive from an established company wants to jump to a more important role at a younger and faster-growing company. He joined Olaplex in June 2021 and helped Olaplex go public.

One other thing I’d like to note is that Olaplex is a private equity-backed company. Advent International owns more than 75% of Olaplex. The lock-up period expires in March so this will likely force downward pressure on Olaplex’s share price as such a large block of shares will likely be offloaded onto the rest of the market. This will also provide more liquidity for larger investors to own some of Olaplex’s business.

Section 5 - Valuation and Financials

Olaplex trades for a premium multiple because of its historical revenue growth, margin profile, and business characteristics. I think that a premium multiple is warranted though.

Multiples based on consensus estimates:

• NTM EV/Sales = 19.3x

• NTM EV/EBITDA = 31.1x

• NTM P/FCF = 33.1x

Consensus estimates have Olaplex growing revenue to ~$1.45bn in revenue and ~800mm in EBIT in 2025. From 2021 through 2025, consensus has Olaplex growing revenue at a CAGR of 25.2% and EBIT at a CAGR of 23.8%. From 2019 through 2021, Olaplex grew revenue at a CAGR of 99.5% and EBIT at a CAGR of 85.0%. I think consensus estimates are underappreciating Olaplex’s future revenue growth. Advent International’s lockup should bring more liquidity and attention to Olaplex’s stock.

The market seems to believe that Olaplex’s revenue growth will fall off and drop from ~100% to around 25%. While yes, management did highlight 25% revenue growth, this guidance was likely conservative because it is Olaplex’s first handful of quarters as a public company.

Section 6 - Risks

One of the major risks that I came across in my research was this quote from Olaplex’s prospectus:

“Cosway Company Inc. manufactures products that accounted for more than 70% of our net sales in 2020 and we continue to rely upon Cosway to manufacture a majority of our current product offerings.”

I think this is a major risk to Olaplex and Olaplex should look to diversify its supplier relationship to not be dependent on one supplier. While investors do not know how much of Cosway Company’s revenue comes from Olaplex, this is not a good data point for Olaplex.