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Olaplex Stock Represents a Strong Investment in a Rising Niche

InvestorPlace - Stock Market News, Stock Advice & Trading Tips OLPX stock is undergoing a successful turnaround and should make money for investors based on its current performance. The post...

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InvestorPlace - Stock Market News, Stock Advice & Trading Tips

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Olaplex Holdings (NASDAQ:OLPX) stock shows many encouraging signs following its late September IPO. Investors may be shy to initiate a position OLPX stock given there is no analyst coverage of the equity. But from my perspective, there are some early signals indicating that this stock has potential. 

A sign for an Olaplex (OLPX) salon on a frosted glass door.
Source: JDzacovsky / Shutterstock.com

Strong IPO 

The idea of a so-called “strong IPO” is essentially a subjective assessment. Oftentimes markets equate a sharp price increase at IPO with a strong IPO. But such equities can often drop quickly thereafter and prove volatile for the quarters that follow. 

So essentially, by that standard, a strong IPO is one in which early investors see quick price appreciation, quickly cashing out and making a handsome return in the process. 

I tend to disagree with that definition of IPO success. In my opinion, the IPO that Olaplex has had is more fortuitous for more stakeholders.

In its short life as a publicly traded entity, OLPX stock has proven to be relatively stable. It has traded in a range between $23 and $26. It’s true: there aren’t many data points from which to make such inferences. But on the other hand, what we don’t see is a situation in which privileged IPO investors cash out and the stock burns. That’s why I believe the hair care products manufacturer and retailer benefits more stakeholders than other “strong” IPOs. 

And another signal that indicates Olaplex’s strength occurred prior to the IPO itself. 

Olaplex’s Upsized IPO Worked 

When a company going public upsizes its IPO, it signals a few things. First, the company believes that demand for its equity has increased—or at least it’s trying to signal to the market that it is more attractive than earlier IPO price estimates. Second, it signals greater risk to investors as higher prices mathematically equate to an increased market capitalization. The risk is that you buy in at higher prices, the company increases its IPO proceeds, and then it tanks post-IPO.

Here’s what’s good about Olaplex: It increased its IPO pricing but hasn’t dipped below those prices after becoming publicly listed. 

Win-Win for OLPX Stock 

Here’s what happened according to the Wall Street Journal:

Olaplex ended up boosting the size of its deal, which sold above its expected range, by 10%. The Santa Barbara, Calif., company had initially planned to offer 67 million shares priced from $14 to $16 each. On Tuesday, Olaplex raised that range to $17 to $19. The IPO collected $1.55 billion after selling 73.7 million shares at $21 each, above an already sweetened range.”

It was a win-win situation. The company boosted its IPO proceeds and investors who jumped in at $21 have a valuable asset with upside. 

That’s a strong price signal for OLPX stock given that it currently has no analyst coverage. Potential investors don’t have to look to Wall Street for signals that shares won’t tank because the market’s pricing is indicating as much. 

Strong Position in Burgeoning Niche

Olaplex produces hair care products. Cosmetics in general are noted for their high margins, and hair care products are no different. In fact, in 2020, Olaplex posted gross margins of 82% and EBITDA margins of 72%. 

The company is the #1 haircare brand at Sephora, the #1 bond building brand in professional haircare, and it boasts the #1 follower count on Instagram. Those kinds of accolades, though not important from a financial fundamentals perspective, are important. 

What is important from a financial fundamentals perspective is that the company reported 90% sales growth from 2019 to 2020. Such strong results certainly emboldened the company to go ahead with its IPO in 2021. 

And as Olaplex noted in its IPO prospectus:

“Haircare represents a large, addressable market and presents significant opportunities for growth. In 2020, the market was sized at $77 billion globally and is expected to grow at a compound annual rate of ~6% from 2020 to 2025. OLAPLEX participates in the prestige segment of the market, which is expected to be the fastest growing segment of the global haircare market from 2020 to 2025.”

Takeaway on OLPX Stock

All of the information above suggests OLPX is stable as a stock, and should grow going forward.

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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