Shareholders of Olaplex would probably like to forget the past six months even happened. The stock dropped 27.3% and now trades at $1.25. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Olaplex, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Olaplex Will Underperform?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why OLPX doesn't excite us and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last three years, Olaplex’s demand was weak and its revenue declined by 14.2% per year. This was below our standards and signals it’s a low quality business. 
2. EPS Trending Down
Analyzing the change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Olaplex, its EPS declined by 40.1% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Olaplex’s margin dropped by 16.1 percentage points over the last year. If its declines continue, it could signal increasing investment needs and capital intensity. Olaplex’s free cash flow margin for the trailing 12 months was 22.8%.
Final Judgment
We see the value of companies helping consumers, but in the case of Olaplex, we’re out. Following the recent decline, the stock trades at 17.5× forward P/E (or $1.25 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
Stocks We Like More Than Olaplex
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