Is the Recent IPO Honest Company a Good Stock to Invest In?

This Los Angeles retail lifestyle company that was founded by actress Jessica Alba went public in May 2021. It is known for its sustainable plant derivative products, which include…

baby products, non-toxic skincare, personal hygiene items, and supplements.

The Honest Company (HNST – Get Rating) went public through a traditional IPO by listing 28.50 million shares on the Nasdaq Stock Exchange on May 5. HNST raised $412.80 million from the IPO, which is expected to fund its general corporate expenses.

The stock opened at $21.22, up 32.6% on its first trading day, which was above the $16 pre-listing share price. However, the shares have since declined 12.2% to close Friday’s trading session at $10.07.

Here’s what we think could influence HNST’s performance in the near term:

Criticisms

HNST’s products are labeled and advertised as non-toxic and sustainable, which differentiates them from competitors. As stated in the company’s IPO prospectus, the company’s brand is “focused on leading the clean lifestyle movement, creating a community for conscious consumers and seeking to disrupt multiple consumer product categories.”

However, several lawsuits were filed against HNST in 2015 and 2016, alleging false and misleading advertisement claims regarding non-toxic products. Though the company denied such allegations, it ended up settling the class action lawsuits. Furthermore, in 2017, HNST’s hit product, diapers, were recalled due to the presence of mold, which impaired the company’s reputation and , in addition to financial losses.

In fact, HNST has listed degradation of product quality as a potential risk factor in its prospectus. This risk has the potential to  create an adverse effect on HNST’s  business, financial condition, brand reputation, and growth prospects.

Inefficient Operations

Despite being operational for nearly nine years since its launch in 2012, HNST is yet to generate a profit. Because the company expects its expenses to increase in the near term as it reinvests to fund its growth strategies, its ROE is expected to remain negative in the near term. Given the highly competitive nature of the sector, HNST states its negative profitability as a significant risk factor, noting that its inability to generate adequate revenues might prevent the company from achieving or maintaining profitability.

IPO-Related Investigations

Shareholder rights Law Firm Johnson Fistel, LLP is currently investigating HNST for potential violations of federal securities laws. In addition, following its poor second-quarter performance, the law firm is seeking  to discover whether the company’s filings with the SEC contain untrue or omitted statements to mislead investors.

Disappointing Second Quarter Results

HNST’s total revenues increased 3% year-over-year to $74.58 million in its fiscal second quarter (ended June 30), driven by a 16% rise in Skin and Personal Care segment sales. However, its revenues…

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