Viral Makeup Company’s Valuation Looks Oddly High

August 19, 2023

By guest author Jinjoo Lee from the Wall Street Journal.


Make up gen 1     Il Makiage commanded about 1.7% of the U.S. prestige cosmetic market last year, in line with Christian Dior and Tom Ford. Photo: Ilya S. Savenok/Getty Images for Il Makiage/The Pop-Up Agency


This column is part of the seventh annual Heard on the Street stock-picking contest.


Not many brands have been able to escape the high-cost pitfalls of being a fast-growing direct-to-consumer company. Oddity Tech ODD -0.11%decrease; red down pointing triangle, the owner of viral makeup brand Il Makiage, has defied those odds so far. As it gets larger, it will get more difficult to maintain its initial glow.

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The company, which only sells its foundations and lipsticks online, says its secret sauce is tech. Il Makiage uses proprietary algorithms and machine-learning models to match its customers with the right shade of makeup. Its SpoiledChild brand does the same for hair and skin products. While other cosmetic brands also have color-matching features on their websites, Il Makiage’s quiz stands out for being extensive and accurate, according to numerous online reviewers. Oddity plans to use the trove of customer data received through such quizzes to help inform new brand launches.

Oddity made its debut on the public markets to roaring applause last month, closing 36 % above its initial public offering price on the first day of trading. Since then, its share price has climbed even farther. The company now commands an enterprise value of USD 2.5 billion, roughly 7.6 times trailing-12-month revenue. That is much richer than the 4.7 times 2022 revenue multiple that L’Oréal agreed to pay for popular beauty brand Aesop earlier this year. It is also a steep premium over some established beauty companies such as Estée Lauder and Ulta Beauty, which trade 3.8 times and 2.3 times multiples, respectively.

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Oddity probably does deserve some growth premium. After doubling its revenue in 2021, the company still managed to grow its top line another 46 % last year to USD 324.5 million. Il Makiage commanded about 1.7 % of the U.S. prestige cosmetic market last year, in line with Christian Dior and Tom Ford, according to a Goldman Sachs report citing data from Euromonitor. If it meets the top end of its own guidance, sales are set to rise 48 % this year. And crucially, it has been profitable since 2020 and is net cash positive. This is a departure from other popular direct-to-consumer brands such as Casper Sleep that burned through cash to fuel growth.

But a closer look reveals a few blemishes. For one, while Il Makiage has a striking number of positive reviews on Google, the brand has also attracted a lot of complaints from customers that said they were enrolled in auto-replenish programs without their knowledge or couldn’t easily reach the customer-service department. Better Business Bureau, which logs complaints from consumers, assigned an F-grade on the brand, noting a pattern of complaints since 2019 regarding billing practices.

Goldman Sachs, which analysed posts on X (previously known as Twitter) across 15 different beauty brands, found that Il Makiage ranked among the worst on brand sentiment. Even the best products can be ruined by poor customer experience, and further growth could require more investment in it. The few online-only sellers that achieved and maintained scale—such as Chewy and Wayfair—did so through excellent customer service.

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Furthermore, experience from other DTC brands suggests that there is a natural ceiling on online-only presence, which means that at some point it will likely take bigger advertising dollars, investment in physical stores or going wholesale to keep growing. In other words, Il Makiage’s current 24.3 % operating margin (resembling those of top luxury brands more than cosmetic giants) likely isn’t sustainable. Beauty brand Glossier, which launched as a digital-only company in 2014, has been opening stores in major cities and earlier this year started selling through Sephora. Warby Parker, Allbirds and Bonobos are all examples of digital brands that eventually opened stores.

When online growth potential taps out, the markets can be punitive: Direct-to-consumer medical scrubs seller Figs’ share prices took a nosedive last year as revenue growth slowed and margins shrank. The company said it would open its first permanent store in the fall. Its stock has shed 81 % since its shiny public debut in 2021.

Most important, the social-media forces that helped Il Makiage and SpoiledChild gain popularity online are powerful but short-lived. Beauty brands’ market share growth in the U.S. tends to stabilise between four to five years after launch, according to Goldman Sachs. Il Makiage appears to be approaching that point, having launched in the U.S. in 2018. While Oddity Tech says it plans to introduce new brands every 18-24 months, there is no guarantee that those will take off in the way that its current products have—especially in a beauty market saturated with new players.

Growth across the industry is expected to slow, too: After 10 % and 8 % growth in 2021 and 2022, respectively, sales growth in the U.S. beauty and personal care market is expected to moderate and return to its historical 3 %-to-4 % annual growth rate starting in 2024, according to Euromonitor.

Excellent concealer is no match for the bumps and wrinkles that are likely to accompany Oddity Tech’s future growth.