Waldencast: Price Can Fall Further For Now, But Medium Term Potential Exists (WALD)

leszekglasner/iStock via Getty Images The cosmetics company Waldencast (NASDAQ:WALD) has had a bad 2024 at the stock markets so far, with a price decline of 64%. The decline started early on in the year following the release of its full-year 2023 results and its positive first quarter (Q1 2024) results didn’t help. This of course, calls for a closer look at the details of its numbers to assess what’s gone wrong. I also look at the current state of its market segment, prestige beauty, along with its outlook and market valuations to assess what’s next for the Waldencast stock. Price Chart (Source: Seeking Alpha) The growing prestige beauty market The company identifies its products as being in the prestige beauty range, which sits somewhere between mass market and luxury beauty brands in terms of price points. However, it has other defining points as well, like a unique brand value and it might also appeal to customer value systems with vegan or cruelty-free products. The company’s key US market, is ~USD 13 billion strong (see chart below), making it the single biggest country market in the world. It’s growth, at 14% in 2023, was healthy too. Source: Statista Growth has softened in 2024 so far, though. In Q1 2024, the skincare and makeup categories, which correspond with the company’s products, grew by 10% and 5% respectively. This can be worrisome since it coincides with a cooling off in the US consumer market, but there are balancing factors at play for Waldencast too. The first is the lipstick effect, a phrase that has been in circulation over the past couple of years. It refers to the consumer inclination to splurge on small luxuries during tight economic times, like during the recent cost of living crisis or even the expected continued slowdown. As a results, beauty brands can continue to witness growth even at such times. The second is the company’s own expansion into international markets, as is discussed in the next section, which can support growth. Focus on skincare and make-up Waldencast, as it exists today, was formed with the merger of Obagi Skincare and Milk Makeup brands in 2022, with both brands contributing almost equally to its revenues today. Obagi Skincare is a medical grade skincare brand targeting challenges like hyperpigmentation, melasma, ageing and acne. It has quite the fan following too, with celebrities from Drew Barrymore and Alicia Keys positively endorsing its products. Milk Makeup, which sells the full set of cosmetic products, has the aim to become the number one brand for the next generation. The brand is certainly growing fast, supporting the company’s top-line growth in 2023 even as Obagi lagged behind. Growing revenues, expanding margins Coming to the financials, Waldencast’s comparable net revenue growth isn’t bad, with a 15% increase in 2023. Growth accelerated further to 21% in Q1 2024. The company’s profit margins are also expanding. As a proportion of the comparable net revenue, the adjusted gross margin was at 76.7% in Q1 2024 (2023: 70.8%) and the adjusted EBITDA margin was at 16.8% (2023: 11.5%). The margin expansion is also visible with GAAP revenues as the denominator (see graphic below). As a side note, the difference between the comparable and GAAP revenues is explained by the exclusion of Obagi’s China business from the comparable figure. This business’s distribution is still owned by the former owner, Cedarwalk Skincare, which has an agreement with Waldencast. Source: Waldencast The Milk Makeup edge Milk Makeup stands out between the two brands even as its contribution to sales is the same as Obagi. This is for two reasons. First, the company’s revenue growth in 2023 is driven entirely by Milk Makeup, which showed ~39% increase, while Obagi was essentially flat. The situation has changed though, with Obagi witnessing a ~21% increase in Q1 2024, similar to 21.5% for Milk. Obagi’s recent growth has benefited from a doubling in e-commerce sales, besides its international expansion in Southeast Asia. Milk continues to make gains from the US market, but like Obagi, also e-commerce growth and international growth in markets like Scandinavia and the UK. However, it would be interesting to see if their growth rates remain similar for the full year 2024 too. Next, Milk has been a significantly more profitable brand for Waldencast in Q1 2024, with an adjusted EBITDA margin of 29.1%, with a significant increase from 18.3% in 2023. Obagi’s margin at 20% in Q1 2024 was also improved from its fully year 2023 margin of 17.7%, but less so. It’s also worth watching whether this differential in margins sustains. Source: Waldencast Positive outlook, elevated market valuation For the remainder of the year, the company’s revenue outlook continues to be positive. In fact, it expects faster revenue growth than seen in Q1 2024. The adjusted EBITDA margin is, however, expected to soften a bit to “mid-teens” from the 16.6% seen in Q1 2024, with GAAP net revenue as the denominator. It would, however still be an improvement from the 11.2% level seen in 2023. These projections yield a forward EV/EBITDA valuation of 20.7x. In estimating the EBITDA for 2024, the comparable net revenue growth is assumed to be 22% for 2024. Also, the projected comparable net revenue to GAAP net revenue ratio is assumed to remain the same as that in 2023 at 97.4%. The absolute EBITDA level is then calculated from the GAAP revenue figure, based on the company’s outlook of a ~15% margin. This resulting forward valuation is a big improvement over the corresponding trailing twelve months [TTM] multiple of 32.2x. However, it’s still significantly higher than the multiples of its closest US based peers by market capitalisation – Nu Skin Enterprises (NUS) and Nature’s Sunshine Products (NATR) at 5.52x and 5.43x respectively. This then explains why WALD’s stock price has been falling despite its otherwise continued performance. It also indicates that there’s further downside to the stock, with the possibility for its EV to fall to a fourth of its current value. What next? For a more mature stock, I would see it as a time to sell. But not in this case. Chances are, anyone who’s bought WALD in the past couple of years since it debuted at the stock markets, has done so with at least the medium term in mind. And from that perspective, there are still gains to be made, even if the stock has to fall before that happens. I’m particularly encouraged by Waldencast’s expansion into international markets. If its growth in the US market is anything to go by, it can expand its revenues fast as it moves into other markets too. Its rising margins are another positive. I’m going with a Hold on WALD. Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

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