US stock, The Honest Company (NASDAQ:HNST) is a consumer goods group selling eco-friendly products. Its founder is actress Jessica Alba, and it went public on New York’s NASDAQ Stock Exchange last month. Honest’s offerings include ‘natural’ baby products, cosmetics, and cleaning goods. The company actively avoids over 2,500 chemicals and materials in its bid to provide ‘clean’, sustainable consumer staples.
Hot US stock disappoints in Q1
Jessica Alba’s company was valued at $1.7bn back in 2015, but today, its market cap is $1.4bn. And its share price has fallen 31% since its initial public offering (IPO). That’s a little concerning, so what’s going on?
Unfortunately, its Q1 quarterly results appear to have disappointed investors. In Q1, it brought in $81m in revenue, which was a 12% rise year-on-year. But it also recorded a net loss of $4.5m, which was a considerable slide from over $0.5m profit previously. Also, its gross margin slipped slightly from 36% to 35%.
It’s clear where the swing to a loss came from. The Honest Company’s marketing spend rose by 54%, which was not wholly unexpected. This hiked operating expenses by 30% year-on-year.
In its Q1 earnings, the company said the total addressable market for its clean and natural market is worth $17bn and projects growth at 6x the conventional market rate by 2025. In this regard, it sees itself as having a unique competitive edge.
Its sales appear balanced between e-commerce and retail, and while all its divisions matter, the company is mainly focused on Skin and Personal Care. The Honest Company targets a balance of male and female, with a particular focus on Gen Z. It has already seen growth in this area from 9% of Q1 2020 customers to 14% in Q1 2021. I think this growth trajectory is promising.
Harnessing the influencer effect
The US company develops its products in-house and uses high-profile influencer marketing to get its message and products across. This also helps it scale. Having Jessica Alba front the company is no doubt going a long way to adding awareness. She gets involved in product launches and regularly produces content showcasing her use of the products.
I think the products look very appealing and particularly relevant as a consumer shift to clean living and sustainability continues.
Inflation poses a risk
The Honest Company is undoubtedly operating in a hugely competitive space with rivals including big, established names as well as younger, nimble start-ups. And it could be hit hard by inflation as products become more expensive to produce and consumers have less cash to spend.
Nevertheless, I think it has an edge as an early operator in the clean beauty space. But it needs to maintain its ‘clean’ and ‘pure’ image, which also gives it the green light as an ESG-friendly investment.
Analyst consensus appears to be targeting a share price around $18, but with inflationary risks ahead, they remain cautious in their outlook. I think it’s probably fairly priced at the moment so I don’t plan on adding this US stock to my Stocks and Shares ISA.
Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.