ODDITY TECH (ODD – NASDAQ) AI POWERHOUSE OR MARKETING MACHINE AND DOES IT MATTER?

Oddity Tech (ODD – NASDAQ) has been on a big win streaks of earnings beats.

They have beat earnings guidance every single quarter since going public.

Seven quarters in a row they have raised revenue and profitability outlook.

They are doing it in a tough environment. Oddity is a Health & Beauty brand – makeup, skincare, hair care and supplements.

A quick look at the competition – Estee Lauder (EL – NYSE), ELF Beauty (ELF – NYSE) and others – paints an ugly picture for the industry as a whole.

Source: Stockcharts.com

How is Oddity outperforming?

That depends on who you ask.

The story that Oddity tells is that they have become a fast-growing juggernaut by leveraging AI and technology to provide a better product and more personalized experience for their customers.

However, the short sellers say that Oddity is just really good at Facebook and Instagram marketing, that their products are not all-that and their only innovation is pulling the wool over the Street’s eyes.

Source: X.com

As for me? I’ll be honest – I’m not 100% sure who is right.

And I’m not sure it matters.

What I know is that Oddity is killing it, that they just put up another beat and raise in Q1, and given the growth, I think the stock is fairly priced.

I don’t care whether their success is coming from superior products, superior customer service or because they are just good at marketing. The path should be up either way.

ODDITY – A HEALTH AND BEAUTY INCUBATOR?

For the moment, Oddity is a two-brand company.

Their flagship brand is Il Makiage, which they launched in 2018. Today it is a $500M brand.

The brand is mainly sold into the United States (though Oddity is talking about a greater focus on international expansion), where it has a market share of over 2%.

Il Makiage is a full line of beauty products. Their flagship is a base foundation called “Woke Up Like This Flawless”. They also have the FCK concealer, the “No Filter Poreless Base Smoothing” primer and the Mineral Baked Blush and Bronzer.

For the eyes they have Icon Mascara, Inkliner Liquid Eyeliner. They also offer lines of lipstick, lip gloss liner, plumper, brow mascara, and various skincare treatments for wrinkles, moisturizing and such.

Source: Il Makiage Website

Oddity’s second brand is SpoiledChild, which was launched in 2023. SpoiledChild has grown into a $150M brand in just 2 years.

SpoiledChild is a holistic wellness brand focused on skin and hair health. Products are hair boosts, scalp serums, hair strengthening serums, anti-aging collagen serums, lip repair masks, and wellness supplements like vitamin gummies and probiotics nutraceuticals.

Source: SpoiledChild Website

Both brands are direct-to-consumer and exclusively online. There is nothing bricks and mortar about Oddity. Oddity has no stores of their own and they don’t sell through distributors like Sephora. A few of their products are on Amazon or the Walmart website but for the vast majority you have to go to the company owned website.

Their go-to-market depends on their website experience. Oddity says they can offer a better online experience than anyone, even better than you can get in the store.

How? Here’s where AI comes in. Oddity use AI to match to your skin type, skin tone and come up with a personalized solution.

The process involves questionnaires, purchase patterns, facial mapping and skin tone detection via computer vision algorithms.

The idea, which they describe at every investor conference, is to duplicate online the experience of a Sephora store, the personalized service that lets you walk out with the right product for you.

Trying to capture that experience online is difficult. Brands have tried and failed. Oddity claims to have done it using AI, data and technology.

Source: Oddity Investor Presentation

Whatever they are doing – it appears to be working! And with more shopping taking place online, their addressable market is large and growing.

TAKING ONLINE SHARE

I don’t think boomers fully appreciate just how much of the shopping experience of the younger generation is moving to online.

Bank of America estimates that online penetration (the percentage of total shopping dollars that is going online) is up to close to 29% and taking over 1% more each year.

Source: Bank of America

Those numbers include everything, most notably grocery spend (which is still done mostly in the store). Drill down to single verticals like Beauty and Wellness, the online penetration is even higher.

In fact, Health and Personal Care is experiencing the fastest growth of any of the Bank of America categories.

Source: Bank of America

Oddity believes that online sales for Beauty and Wellness will grow to be 50% of total beauty product sales in the coming years.

Because Beauty and Wellness is such massive market, its a big opportunity if Oddity can succeed. The entire category is over $600B.

Source: Oddity Investor Presentation

If Oddity is indeed the best at delivering the online experience, they have an extremely big TAM to pick away at.

KEEPING THEIR SHARE

The questions are: does Oddity actually provide a better experience? Do customers leave with a better product?

The answers drive controversy.

The bears say there is nothing special, its all smoke and mirrors.

Oddity counters with the following chart, which is showing the growth rate of repeat customers – what they call Net Revenue Repeat Rates.

Source: Oddity Investor Presentation

What is the Net Revenue Repeat Rate (NRRR for short)?

NRRR is the total 12-month sales of a customer over a given period (12 months, 24 months, 36 months, etc.) as a percentage of the sales that customer made in the first period they bought product.

For example:

• A cohort of customers generated net revenue of $1,000 in January 2021 from their first orders
• They then generated net revenue of $700 on additional orders in the following 12 months.
• Their 12-month net revenue repeat purchase rate would be 70%.

The takeaway from the above chart is that each year the line gets steeper. It took 4 years for the 2019 cohort of customers to get back to 100% NRRR. It took less than 1 year for the 2023 cohort of customer to do that.

Regardless of what you think of the products and the service Oddity provides, you can’t deny—that’s a pretty good number.

MY OWN TIKTOK CHALLENGE

To get a better sense of what customers think of the brands, I made the painful journey onto TikTok.

I forced myself through about three dozen reviews of Il Makiage and SpoiledChild. These are about a minute and a half reviews (TikTok is for the attention deficit generation) done by regular women that are usually using the product for the first time.

What did I find? No red flags. Nothing that really wowed me either positively or negatively. Some reviews were bad, and some were good. Some women think the product works great and some don’t.

Look, I’m not a female and I don’t wear makeup and so what do I know. But I have a strong suspicion (which my wife backs up) that Health and Beauty products are a very personal choice.

What is good for one person is not necessarily the choice for someone else.

To back this up, just walk through the cosmetics section of your local pharmacy. Is there another sector with more brands and sub-labels and whatnot? I doubt it.

My point is that it’s not black or white. The shorts may indeed be correct that some people hate the products. I just don’t know if that matters.

USING AI TO Create a better product (or at least a better story)

Part of Oddity’s AI story is how they use it to attract and retain customers by providing a better experience. The other part of the story is how they harness AI for product development.

Oddity’s goal is to create billion-dollar brands from Il Makiage and SpoiledChild within five years. They are well on their way. Their second goal is to add more brands to the platform to fuel even more growth.

They go to some pains to describe themselves as a technology company. They say they use AI to drive molecule-discovery, much like a biotech might. But they are searching for molecules that produce better beauty and wellness products.

Source: Oddity Investor Presentation

Again, this could be 90% marketing. I don’t know. They don’t break out R&D spend, which admittedly is a bit odd.

But again, it probably doesn’t matter. As we all learned from watching MadMen, its not really about product.

Source: X.com

Oddity is trying to build a platform that can scale brands online. What matters is that Oddity can add those brands and convince consumers that they are worth buying, whether they are made with AI or not.

Their R&D arm is Oddity Labs, which is the evolution of their 2023 acquisition of Boston based Startup Revela for $76M.

Revela specialized in AI-based molecule discovery for beauty and wellness. Revela was known for developing a molecule that promoted healthier hair follicles and another that enhanced skin elasticity.

The first two products coming out of Revela post-acquisition are going to be revealed this year. It should be a big deal, at least made into a big deal, and CEO Oran Holtzman said a few months ago that these two new brands are consuming 40% of his own time.

If either are successful it will become the next driver of growth.

Oddity also has an R&D center in Tel Aviv. As best I can tell, this isn’t molecular R&D. It seems more focused on data science for their consumer facing platform.

This would be stuff like the AI personalization algorithms and research and development of marketing techniques. Which quite honestly may be even more important work than what is being done in Boston.

A BRAND CREATION MACHINE

The Oddity story is twofold.

First, this company is growing revenue like a weed. Whether it is because they have a better product, are doing cutting edge molecular research or are just expert marketers, I have no idea. But grow they do.

They are growing into an extremely large market. If you asked a dozen TikTok creators about Il Makiage you’d get something close to a clean split in opinions. Well, half of the Health and Beauty online TAM is a pretty big carrot.

What is real is their growth—and the bear case can’t deny it.

Source: Oddity Financials

Maybe because the bears lean on the stock, Oddity is actually priced relatively reasonably given the growth.

Analysts are estimating 23% revenue growth for 2025 (that is inline with their current guidance) and 20% for 2026.

Oddity is guiding to adjusted EPS between $1.99 and $2.04 per share. At $60 that puts the stock at 30x PE. I mean, its not cheap, but in today’s environment of inflated multiples especially for growth stocks, could be considered a relative bargain.

It remains to be seen how the new brand part of the story plays out, and whether Oddity can duplicate their success with the two additional brands to be launched this year.

Again, maybe the products will amaze. Maybe not.

Either way, they still may sell well if the marketing machine is as good as advertised.

Doesn’t matter to me, so long as the stock goes up.