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What happened

Shares of Oddity Tech (NASDAQ: ODD) stock fell 22% in August, according to data from S&P Global Market Intelligence. It posted its first quarterly report as a public company, and while the results were excellent, the stock had already shot up right after its initial public offering (IPO). High-growth IPO stocks often pull back after an initial jump.

So what

Oddity operates two websites, Il Makiage cosmetics and SpoiledChild hair and skincare, that sell direct-to-consumer products. It uses artificial intelligence to assess consumer needs and develop formulas and recommendations for custom preferences. It uses a sophisticated system that has hyperspectral capabilities, which means it can evaluate a customer’s skin from a smartphone image with greater accuracy than the human eye. That’s an incredible feature for any skincare company, but all the more so for a digital-based operation, since it takes care of one of the main blocks to buying skincare products online. It should also reduce returns significantly.

Another way it’s differentiated from similar companies is that it works with influencers, who post video tutorials and reviews to Oddity’s sites using its own video program. This provides constant fresh content for the websites to keep customers coming back, and it’s a way to find target customers through influencers that they follow.

Oddity came onto the markets as a high-growth company that’s already profitable. That trend continued in the 2023 second quarter. Sales increased 69% over last year, beating even the high end of guidance, and net income was $30 million, up from $16.6 million last year, and also coming in ahead of guidance.

Management raised full-year guidance for revenue from $453 mill to $475 million and earnings per share from $1.06 to about $1.14.

Now what

Oddity stock was priced at $35 at IPO in July and closed the first day at $47. That’s already a rich valuation, and it continued to climb until it fell after the earnings report. As good as it was, investors got a dose of reality, and the valuation looked out of touch. That’s what often happens with hyped-up IPO stocks.

At the current price, shares trade at a price-to-earnings ratio of about 46, which is a premium valuation. It’s not astronomical, and could even be reasonable for a high-growth stock. But on the market for such a short time, there are many unknowns. That makes it a stock to watch.

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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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