Why analysts think the Adore Beauty (ASX:ABY) share price has 40% upside

Adore Beauty shares are rated as a buy, with growth of expectations.

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The Adore Beauty Group Ltd (ASX: ABY) share price is rated as a buy with expectations of attractive capital growth over the next 12 months.

For readers that don’t know what Adore Beauty is, it’s an e-commerce ASX share that sells many thousands of different products from hundreds of brands.

But what’s what it does. What do analysts currently think of the business?

Broker ratings on the Adore Beauty share price

Both UBS and Morgan Stanley both rate the online beauty business as a buy.

Interestingly, both of them have a price target of $6 on the company. That’s a potential upside of around 40% over the next year, if both brokers are right.

Both brokers note the continuing high level of revenue growth that the company saw in the first quarter of FY22 as well as active customer growth. Both brokers are expecting Adore Beauty to report double digit sales growth for the whole of the 2022 financial year even though lockdowns have ended.

FY22 first quarter update and initiatives

In the first three months of the new financial year, Adore Beauty saw revenue growth of 25% year on year to $63.8 million. Active customers increased 24% to 874,000. Management pointed to strong customer retention, with returning customer growth of 63% year on year.

The business is working on a number of strategic initiatives including scaling its mobile app, building owned marketing channels and community, whilst expanding its loyalty program.

In terms of connecting with its customer base, Adore Beauty’s Beauty IQ podcast surpassed 3 million downloads, the bite-sized beauty podcast was launched and multiple sold-out virtual loyalty events were hosted. Its first private label brand is on track to launch in the third quarter of FY22.

The e-commerce opportunity

One of the things that may be influencing the Adore Beauty share price is the company’s prospects. Management say that the company has a large and growing addressable market, operating within Australia’s $11.2 billion beauty and personal care category. Online sales only represent 11.4% of the total market.

While the market is growing at a compound annual growth rate (CAGR) of 3.8%, online growth is growing much quicker, with a forecast CAGR of 26% between now and 2024. Adore Beauty has a 13% market share of the online market.

Adore Beauty says it has a loyal and highly engaged customer base. Each year a customer remains on the platform, they become more valuable, increasing both their order frequency and basket size.

The company also says that it’s benefiting from structural tailwinds, including the accelerated shift to digital channels and the impact of new digitally native millennial and Gen Z consumers entering the market. Those consumers are continuing to increase their purchases.

Globally, the business is seeing accelerated growth in segments of the market where Adore Beauty is particularly strong, including skincare, which is its biggest category.

Adore Beauty share price valuation

The company is expecting its earnings before interest, tax, depreciation and amortisation (EBITDA) margin to remain between 2% to 4% in the shorter-term whilst it reinvests to continue to grow at a fast pace.

In the longer-term, scale benefits should lead to operating leverage and deliver EBITDA margin according to management.

Due to the high level of investing, brokers aren’t expecting much profit in the next couple of financial years.

According to Morgan Stanley, Adore Beauty shares are valued at 86x FY23’s estimated earnings.

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 recommended Adore Beauty Group Limited. 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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