The Honest Company IPO: Pricing and Valuation Analysis

This morning, The Honest Company, a consumer goods firm backed by significant venture capital, disclosed its anticipated initial public offering (IPO) price. The company is projecting to offer shares to investors at a price between $14 and $17 per share.

Share Distribution and Existing Stakeholders

The company itself will be selling 6,451,613 shares during its IPO. Additionally, current shareholders will be offering 19,355,387 shares for sale on the public market.

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IPO Size and Previous Funding

The Honest Company’s IPO is relatively small in scale. The shares being offered directly by the company are valued at up to $109.7 million, based on the upper end of the proposed price range.

Considering the company’s last private funding round in 2018, which totaled $200 million, the current IPO represents a more conservative valuation.

Valuation Range and Financial Data

We are examining the IPO pricing of The Honest Company to determine its potential valuation. This involves calculating valuation ranges based on different share counts and comparing it to previous private valuations.

A review of the company’s preliminary financial results for the first quarter of 2021 is also included in this analysis.

Significant Investor Confidence

According to Crunchbase data, investors such as IVP, Fidelity, Lightspeed, General Catalyst, ICONIQ, M13, and Dragoneer have collectively invested over $500 million in the Jessica Alba-founded company while it was still privately held. This demonstrates substantial confidence in the company’s potential.

Leadership and Board Structure

Jessica Alba continues to serve as the company’s chief creative officer and also holds the position of board chair, as detailed in the company’s filings.

Understanding the IPO Motivation

It is important to assess whether The Honest Company is capitalizing on favorable market conditions to complete its IPO. Is the company seeking to achieve a public listing despite potential challenges, or does it represent a genuinely promising investment opportunity?

A thorough understanding of the company’s worth and the rationale behind its IPO is crucial for evaluating its long-term prospects.

The Honest Company’s IPO Valuation

Based on an outstanding share count of 90,518,137 following its initial public offering, Honest Company is valued between $1.27 billion and $1.54 billion, calculated at a share price of $14 to $17. Renaissance Capital estimates a fully diluted valuation of $1.6 billion at the midpoint of this range, potentially reaching approximately $1.75 billion at the higher end of the anticipated pricing.

Determining whether these figures represent strong performance requires considering two perspectives: the company’s previous private valuation, or an assessment of its recent financial results.

Considering the initial point, the assessment appears positive, although not exceptionally so. A private equity investment round in 2018 established a valuation that remains undisclosed; however, a comparison of share prices can offer insight.

According to the company’s S-1/A filing, this round involved Series F preferred stock priced at $9.8024 per share and common stock at $5.7500.

Therefore, if Honest Company prices its IPO within the proposed range, or even higher, investor L Catterton will have realized a favorable return on their investment.

Is this likely? A concise financial overview will help answer this question. The company’s income statement reveals a business that experienced growth during the pandemic while simultaneously decreasing its losses.

These results are certainly encouraging.

Notably, the company’s operating loss decreased by over 50% in 2020. Furthermore, the company transitioned from adjusted losses of $9.7 million in 2019 to a 2020 adjusted EBITDA of $11.2 million. This is a positive trend, despite the often-questionable reliability of adjusted EBITDA figures.

However, Honest Company continues to require cash for operations, consuming $12.1 million in 2020 to fund its activities. While an improvement over 2019, the company’s gross margin in the mid-30s currently doesn’t allow for self-funding.

The company’s historical growth has been moderate. Revenues ranged between $72 million and $73 million in the first two quarters of 2020, increasing to $77 million and $78 million in the subsequent two quarters. The company projects revenues of $78 million to $80 million for the first quarter of 2021.

This represents, at best, 11% year-over-year growth, coinciding with a potential decline to at most adjusted EBITDA breakeven, a reduction from the profitability observed in the first quarter of the previous year.

This presents a challenge.

At the upper end of its Q1 2021 revenue projection, Honest Company concluded March with an annualized revenue run rate of $320 million. This means its $1.75 billion diluted valuation equates to 5.5 times its current run rate. This multiple is less robust compared to many recently covered venture-backed companies.

However, unlike high-margin SaaS businesses, Honest Company lacks comparable gross margins or revenue retention. It operates under a fundamentally different business model, justifying its pursuit of a single-digit multiple.

A definitive valuation remains elusive. While outside our typical scope, the fact that Honest Company is proceeding with an IPO at a price potentially exceeding its final private round suggests that early investors are poised for a successful return. It is not a Snowflake-level event, but at its current IPO price range, Honest Company can be considered a success – although investors may have initially anticipated greater returns.

Regarding the possibility of a price increase, we do not anticipate one. However, a final IPO price between $12 and $20 per share would not be unexpected. Further updates will be provided as a final price or revised range becomes available.