Fundsmith manager Terry Smith is often compared to Warren Buffett. Both investors have delivered market-beating returns, with Fundsmith generating an annualised 15.3% return since inception in 2010.
Therefore, it’s certainly worth noting whenever Smith adds a new stock to his fund.
Recent regulatory filings show that he’s been quietly buying shares of one small artificial intelligence (AI)-enabled company.
A bit of an oddity
The stock is Oddity Tech (NASDAQ: ODD). Fundsmith initiated a position in Q3 then significantly added to it in Q4.
Oddity is a consumer tech company in the beauty industry. It has two growing digital-first brands: Il Makiage sells cosmetics while SpoiledChild offers hair and skincare products.
Possessing over 1bn data points from 40bn+ unique users, the Il Makiage PowerMatch algorithm analyses skin tone and beauty needs via a phone camera. The firm claims it matches better than any human eye, resulting in superior product recommendations and fewer returns.
According to Cosmopolitan, Il Makiage‘s signature Woke Up Like This foundation has more than 550,000 independent five-star reviews. So there’s evidence the company might be on to something powerful here.
A rarity
Since Oddity’s initial public offering (IPO) last year, the shares have fallen 25%. Yet the firm is already profitable, which is unusual for a new tech IPO.
In the third quarter, revenue increased 37% year on year to $94m. Meanwhile, gross margin expanded to 70.3% from 68.1% and net profit rose from $2.8m to $3.8m.
For the whole of 2023, the company expects net revenue of $493m-$497m, ahead of its previous guidance ($475m-$480m). That would represent annual growth of 52%-53%.
At the end of September, it still had $164m of cash and equivalents and no debt on the balance sheet. So the company’s financial situation looks strong.
Valuation
Fundsmith is famous for its simple three-step investment strategy:
- Buy good companies
- Don’t overpay
- Do nothing
Trading at 22 times forecast 2024 earnings, the stock passes the second test (don’t overpay).
In fact, I reckon this promising growth stock may prove to be a bargain at this price.
Smart backing
Encouragingly, other renowned investors see something here too. Smithson Investment Trust, which was founded by Terry Smith, invested at the IPO.
Its manager Simon Barnard said that was something “we did not do lightly…[but] we were extremely impressed by [Oddity’s] track record as well as the potential opportunity for the company.”
Scottish Mortgage Investment Trust, an early public backer of Amazon and Tesla, also owns shares.
I’m interested
Currently, the market appears to be valuing Oddity simply as a growing retailer rather than a potential AI-powered disruptor of the beauty industry.
That’s likely to be in part due to the challenging consumer environment. Analysts expect the firm to grow sales by 20% in 2024 and 2025, indicating slower rates of growth. So there’s risk here if economic conditions worsen.
Nevertheless, the $430bn global beauty industry is still growing at 6% a year, according to researcher McKinsey.
Therefore, the firm is targeting a huge market and may have many years of growth ahead of it. This makes the current $2.2bn market cap look attractive.
Having piqued my interest, I’ve added the stock to my watchlist. I can see why Terry Smith has invested.
