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

Could the Adore Beauty share price be one to look at this year?

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The Adore Beauty Group Ltd (ASX: ABY) share price might be one to think about after its volatility over the last three months.

Adore Beauty is an e-commerce beauty business. It sells over 260 brands with 10,800 products.

Recent Adore Beauty share price movement

If you look at the Adore Beauty share price over the last three months, it hasn’t much that much. But it dropped all the way to around $3.30 in the middle of May and has since climbed around 55% to be at the current share price.

Trading update

A couple of months ago, it released its FY21 third quarter trading update. In the update, it said that revenue was up 47% to $39.4 million.

Active customers at the end of the third quarter had reached 687,000 – this was an increase of 69%.

Adore Beauty boasted that it has been seeing strong retention and re-engagement rates for new customers acquired during the COVID-19 period.

The e-commerce business said that it’s on track to achieve full year FY21 revenue growth of between 43% to 47% year on year.

Adore Beauty is continuing to pursue disciplined investment to drive revenue growth and further expand its online leadership position. Management advised the FY21 earnings before interest, tax, depreciation and amortisation (EBITDA) will reflect the company’s continued investment, including in marketing and advertising, as well as the cost of increased staff levels.

Management believe that the company continues to grow its market share, but it wants more. It wants to improve its range and believes there are adjacency expansion opportunities. Adore Beauty is also working on private label development.

The potential opportunity for Adore Beauty?

Adore Beauty says the beauty and personal care market in Australia is worth $11.2 billion and is expected to grow at a compound annual growth rate of 26% to 2024.

Online sales make up 11.4% of the beauty and personal care market. The Australian digital penetration rate is lower compared to countries like the US, the UK and China.

Due to the size of that potential opportunity, Adore Beauty plans to invest to grow its market share by increasing brand awareness, winning new customers and improving customer retention.

Management are expecting higher profit margins over time:

Given the predominately fixed nature of the business’ cost base, management expects scale benefits to increase operating leverage and deliver EBITDA margin expansion in the longer term as the company continues to grow revenue.

Is the Adore Beauty share price an opportunity?

The broker UBS rates the Adore Beauty share price as a buy with a price target of $5.60.

Whilst UBS notes an e-commerce slowdown in the short-term, it believes that online beauty is a good growth trend for Adore Beauty in the long run. The company can invest in advertising and see customer loyalty improve over time.

It is expecting Adore Beauty to be able to generate over $360 million of sales in FY25.

If UBS is right with its priec target, then the Adore Beauty share price might go up just under 10% over the next 12 months.

Should you invest $1,000 in Adore Beauty right now?

Before you consider Adore Beauty, you'll want to hear this.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Adore Beauty Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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