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Is the Adore Beauty (ASX:ABY) share price in the buy zone?

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Earlier this month the Adore Beauty Group Ltd (ASX: ABY) share price landed on the Australian share market following the completion of its $269.5 million initial public offering (IPO).

The online beauty retailer’s shares had a sensational start and stormed to a high of $7.42. This was 10% higher than its IPO listing price of $6.75.

However, since then, the Adore Beauty share price has given back these gains and more.

At the close of play on Friday, its shares were fetching $5.70. This is a 15.5% decline from its listing price.

What is Adore Beauty?

Adore Beauty, which was created in a garage in Melbourne 20 years ago, is a leading online beauty retailer.

It generates its revenue through online sales of third-party beauty and personal care products to Australian and New Zealand consumers.

At the last count, the company had over 590,000 Active Customers and was expecting to generate revenue of $158.2 million from them in calendar year 2020.

From this, management expects to deliver a gross profit of $50.8 million and a net profit after tax of $3.5 million. This implies a gross margin of 32.1% and a net margin of 2.2%.

How does its valuation compare?

Adore Beauty currently has a market capitalisation of $537 million. This means its shares are changing hands for 3.4x forward sales and 153x forward earnings.

As a comparison, fellow ecommerce company Kogan.com Ltd (ASX: KGN) is priced at 2.2x estimated FY 2021 revenue and 45x estimated FY 2021 earnings.

Whereas Temple & Webster Group Ltd (ASX: TPW) shares are trading at 4x estimated FY 2021 revenue and 50x estimated FY 2021 earnings.

Should you buy Adore Beauty shares?

Based on the above valuations, Adore Beauty doesn’t jump out as being great value, particularly in comparison to Kogan.

However, it is worth remembering that it is still reasonably early days for the company and it has the potential to increase its sales at a rapid rate over the coming years and grow into its valuation. Especially given the relatively low online penetration rate of the beauty and personal care market in Australia.

According to a presentation, Frost & Sullivan estimates that beauty and personal care products sales in Australia (both online and offline) reached $10.9 billion in 2019.

However, just 7.3% of these sales were made online during the year. This lags international markets such as the United States and the United Kingdom, with estimated online penetration levels of 15.4% and 12.7%, respectively.

Adore Beauty believes that online penetration of the beauty and personal care market in Australia will continue to increase, and that COVID-19 may accelerate the rate of online penetration going forward. And I would have to agree.

Overall, I think the company could be a good buy and hold option for investors. Though, given the multiples its shares trade on, it might be best restricting an investment to just a small part of a balanced portfolio.

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd and Temple & Webster Group Ltd. The Motley Fool Australia has recommended Kogan.com ltd and Temple & Webster Group Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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