Why is the Adore Beauty share price sliding 6% on Monday?

Rejection proves to be a bitter pill for Adore Beauty…

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Key points

  • The Adore Beauty share price is down 5.1% to $1.30 on Monday
  • The online cosmetics company is set to be removed from the All Technology Index prior to 20 June 2022
  • Shares in the company are down 68% since the start of the year

The Adore Beauty Group Ltd (ASX: ABY) share price is nursing some losses today as the company looks to get the boot.

It appears revenue growth alone isn’t enough to retain a spot in the S&P/ASX All Technology Index (ASX: XTX). After suffering through a 68% fall in its share price, Adore Beauty is slated for removal from the index in the latest quarterly rebalancing.

The online cosmetics retailer is not alone in its abandonment by the tech-focused index. Joining in the rejection are nine other ASX-listed companies that failed to meet expectations.

Paltry profits don’t cut it

Since bursting onto the ASX scene in October 2020, Adore Beauty has delivered substantial improvements to its total revenue. However, the market has shifted during this time to be more appreciative of present profits rather than promised profits.

The online beauty and skincare product retailer has been unable to maintain a meaningful margin in the last 12 months. At the end of 2020, Adore Beauty achieved $4.49 million in earnings, representing a 2.7% earnings margin. However, this shrunk to a slim 0.1% margin by the end of 2021.

As a result, the Adobe Beauty share price has undergone heavy erosion since its addition to the ASX tech index back in March last year. The removal will be put into effect prior to the market opening on 20 June 2022.

Ultimately, this means funds tracking the All Tech Index will no longer need to hold Adore Beauty shares. In turn, the company is likely to be weighed down by selling pressure as these positions are liquidated.

On the bright side, the company still maintains its position in the S&P/ASX All Ordinaries Index (ASX: XAO).

How does the Adore Beauty share price compare?

Despite the fall in the Adore Beauty share price, it still appears relatively rich at a price-to-earnings (P/E) ratio of 467. Potentially investors are more prone to valuing the company on the price-to-sales ratio, given that it is currently prioritising growth.

In terms of P/S multiple, Adore sits between ASX-listed peers Cettire Ltd (ASX: CTT) and Redbubble Ltd (ASX: RBL) at 0.7 times sales.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Cettire Limited and REDBUBBLE FPO. 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 and Cettire Limited. 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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