Olaplex Holdings: Is a 37% Discount Too Good to Ignore?

Olaplex Holdings, Inc. (NASDAQ:OLPX) has sparked investor curiosity after its shares fell to $1.22 in mid-April - a price that’s 37% below its intrinsic value as calculated by a Discounted Cash Flow (DCF) model. But is this discount a buying opportunity, or a warning sign? Let’s dissect the numbers.

The Case for Undervaluation: DCF and Analysts Agree… Sort Of

The DCF analysis paints a compelling picture. A two-stage model estimates Olaplex’s equity value at $1.3 billion, translating to a $1.93 per-share fair value. This calculation assumes a conservative long-term growth rate of 2.8% (aligned with government bond yields) and a cost of equity of 8.5%. At its current price of $1.22, the stock sits 36.7% below this intrinsic value, suggesting a potential bargain.

Analysts, too, see upside. The average one-year price target stands at $2.40 - 32.75% above today’s price and 2.5% above the DCF estimate. This target implies investors might be pricing in a rebound by August 2025, despite near-term headwinds.

The Elephant in the Room: Earnings and Margins Are Slipping

But optimism faces hurdles. Analysts project Olaplex’s earnings to decline by 32.4% annually over the next three years, with profit margins collapsing to 4.6% in 2024 from 13.4% previously. This erosion stems from rising competition in the hair care market and the expiration of key patents, which could dilute Olaplex’s dominance in the bond-building treatment niche.

The Snowflake Score underscores this tension: while the stock’s valuation earns a 2/6 (signaling undervaluation), its Financial Health score of 3/6 reflects manageable debt (debt/equity of 74.4%) but also volatile earnings.

Risk vs. Reward: A Volatile Balance

Olaplex’s shares have already taken a brutal beating, plummeting 95% since its IPO. Yet, the stock’s recent 9.6% year-to-date decline hints at lingering investor skepticism.

The Bull Case: The $2.40 price target assumes Olaplex can stabilize margins, innovate new products, and weather patent expirations. If the company executes, the stock could recoup some of its losses by 2025.

The Bear Case: Competitors like L’Oréal and Unilever are aggressively expanding in the hair care space, while Olaplex’s reliance on a single product line (its signature bond-building treatments) leaves it vulnerable. A prolonged earnings slump could push the stock further down.

Conclusion: A Discount with Caveats

Olaplex’s 37% discount to intrinsic value creates an intriguing entry point for long-term investors willing to tolerate volatility. The $2.40 analyst target - if achievable - would represent a 96% total return from today’s price. However, this hinges on Olaplex reversing its earnings decline and fending off competition.

The key risks are clear: stagnant margins, patent expiration timelines, and the broader beauty industry’s shift toward budget-friendly alternatives. For now, the stock’s $1.22 price reflects these concerns, but patient investors might find value in a brand still synonymous with haircare innovation.

Final verdict? Olaplex’s discount is real, but the path to recovery is narrow. Proceed with caution, and keep a close eye on Q2 2025 earnings and margin trends.