Motley Fool Australia

The Adore Beauty (ASX:ABY) share price on watch after Morgan Stanley “overweight” recommendation

Smiling woman applying face cream in mirror
Image Source: Getty Images

The Adore Beauty Group Ltd (ASX: ABY) share price will be one to watch following an “overweight” recommendation by broker Morgan Stanley.

The online beauty retailer first hit the radar of most ASX investors during its initial public offering (IPO) on 23 October.

On its first day of trading, Adore Beauty shares gained as much as 10% in intraday trading from the IPO price of $6.75, reaching $7.42 per share.

Shares were heading strongly higher in early morning trade today, up 2.0%, before the ASX shuttered its doors for as yet unexplained technical issues.

Despite that bounce, Adore Beauty’s share price remains down 11.6% since the closing bell rang on 23 October.

For comparison, the All Ordinaries Index (ASX: XAO) is up 4.9% over that same time.

What does Adore Beauty do?

Online beauty retailer Adore Beauty was founded by Kate Morris in 2000 when she launched her business in her Melbourne garage with the aid of a $12,000 loan from her boyfriend’s parents.

On 23 October 2020, the company officially went public with its ASX IPO. Adore Beauty stocks more than 230 leading beauty brands, offering customers quick and easy access to some 11,000 products, ranging from premium to everyday use.

Why does Morgan Stanley see upside to Adore Beauty’s share price?

Broker Morgan Stanley has put a price target of $8.35 on Adore Beauty’s shares alongside an overweight recommendation. That represents a 36% share price gain from the current $6.12 per share.

As the Australian Financial Review reports, the broker sees a lot of growth potential ahead for the online beauty retailer. And it thinks that Adore Beauty’s own revenue forecasts are too conservative.

Adore forecasts revenues of $89 million in the first half of 2020-21, while Morgan Stanley has that figure at $93.6 million, rising to $103.9 million in the second half year:

The total addressable market for the e-commerce beauty retailer is estimated at $3.2 billion by 2023-24 (or $12.9 billion including in-store sales), analyst Joseph Michael concludes, implying 30 per cent compound annual growth between now and then. The strong growth is supported by our estimate of an increase in online penetration to 25 per cent by 2023-24 from 7 per cent in 2018-19.

If Adore Beauty can overcome the risks to its growth forecast – including competition from the brands it sells and a post-COVID consumer return to brick and mortar shopping over online – the share price will be one to watch.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of June 30th

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.

Related Articles…