The Honest Company (NASDAQ:HNST) is a lifestyle brand most famously associated with founder Jessica Alba that sells a variety of personal care and beauty products, as well as diapers and other baby care products.
It primarily sells online through its own website and other eCommerce channels, though its brand also has a presence in brick-and-mortar retailers.
What has separated the firm from other rivals is the focus on green, sustainable ingredients that appeal to health-minded and environmentally conscious consumers.
The company went public in 2021 at a time when stocks were soaring high. Shares briefly traded above $20 per share before steadily falling for the rest of the year. By 2022, HNST shares were priced in the low single digits, where they have mainly remained ever since.
During the intervening years, the company’s fundamentals have improved, leading to the question of whether The Honest Company could be set for a rebound. How high could Honest stock go in the future, and is now the time to look at this company for a recovery?
Key Points
- Revenue is rising, and losses are shrinking, showing progress toward profitability.
- Potential 50% upside with fair valuation makes it attractive for investors.
- Limited moat, marketing challenges post-Alba, and share dilution, offset by strong financial health.
A Look at The Honest Company’s Performance
One thing it seems Wall Street isn’t entirely rewarding about The Honest Company is its ongoing trend of fairly steady revenue growth.
For the full year of 2021, the company brought in about $319 million in revenue. While the top line dipped slightly to $314 million in 2022, last year saw growth return as full-year revenue rose to $344 million. For the 12 months ending in Q2, the total was $355 million.
Though the growth rates haven’t been enormous, management has delivered steady, consistent growth over the last two years that is likely to support higher share prices if it persists.
The company has also made progress toward becoming profitable. The Honest Company lost $50 million and $39 million in 2022 and 2023, respectively. While losses are ongoing, the trailing 12-month loss for the period ending in Q2 was a much more modest $12 million.
Both of these trends were firmly on display in the company’s Q2 earnings report, which detailed record revenues of $93 million and a net loss of just $4 million.
Financially, The Honest Company also appears to be in pretty good health with about $37 million in cash and cash equivalents and no debt providing a strong foundation.
Management also upgraded its revenue growth forecast for the year, though specific numbers weren’t provided. Previously, the company’s guidance suggested low-to-mid single-digit revenue growth for FY2024.
That range has now been raised to mid-to-high single digits, suggesting that management believes Q3 and Q4 will continue to produce decently strong revenue growth results.
Where Do Analysts See HNST Going?
While HNST has produced significant losses since its IPO, analysts appear bullish on the stock’s chances for a turnaround. The median target price based on eight standing forecasts is currently $5.75 per share.
Given the stock’s latest closing price under $4 per share, this would give The Honest Company an upside of over 52 percent.
Furthermore, HNST has six Buy ratings, two Hold ratings and no Sell ratings.
Is Honest Undervalued?
Another point in The Honest Company’s favor is the fact that the stock trades at fairly reasonable pricing multiples.
HNST shares trade at 1.1x sales and 2.9x book value, both of which are generally justifiable for a young company that is still growing at a healthy pace.
While investors may not be getting any spectacular bargains on stock in The Honest Company right now, it also doesn’t appear that the stock is overvalued.
The Honest Company Lacks a Moat
The most obvious concern for shareholders is the lack of a defined moat. While revenues have grown at a respectable pace over the last two years, those results have come at a time of generally rising consumer spending.
A headwind for Alba and her team is buyers tightening their belts due to rising costs which lower purchase volumes.
As a celebrity-founded brand, Honest is also closely tied to a single individual. While this can be helpful in gaining initial recognition, celebrity brands can also wane as their founders pursue newer projects. This dynamic may well play out at The Honest Company going forward, as Alba announced in April that she would be stepping back from her role as Chief Creative Officer. Without the popular actress promoting the brand as actively, it’s possible that the company will have a more difficult time with marketing.
Investors may also be concerned with the company’s habit of slowly but surely increasing its number of outstanding shares. Though the rate of expansion has been in the low single digits since early 2023, Honest consistently issues new shares.
This concern for existing owners is the ongoing dilutive effect that may hamper the best possible returns. In Q2, the number of shares climbed by 5.3% compared to the year-ago period, the largest year-over-year increase since 2022.
So, How High Could Honest Stock Eventually Go?
The consensus price target among 7 analysts is fore Honest stock to rise to $5.39 per share.
While HNST isn’t without its fair share of headwinds, the combination of respectable growth and a fair valuation may appeal to investors looking for stocks to buy and hold for the long run.
With revenue growth expected to persist throughout 2024, shares may gradually creep higher as sales and profitability build. Honest’s progress toward profitability is likely to also push shares higher if it can keep that trend going and eventually reach positive GAAP earnings.
The company’s financial standing also makes it fairly attractive. Without debt and with a strong cash reserve, The Honest Company is likely to have to have a more severe reversal of fortunes to find itself in financial hardship. This likely limits the downside potential of HNST and may offset some of the risks associated with the stock.
As far as actual numbers go, it may be unwise for investors to bank on the upside of over 50% reflected in analyst price forecasts. So far, HNST has been fairly resistant to considerable price spikes, even as the company’s revenues have grown and its losses have narrowed. If top line growth is sustained as expected, though, it seems reasonable to conservatively expect shares to rise to between $4 and $4.50 per share over the next year or so.