Oninvest investigates: Does celebrity backing help boost the value of companies?

Celebrity investment or collaboration often gives a healthy boost to stocks. For investors the question is: How to make money on hype around a celebrity backer?

In late May, e.l.f. Beauty announced the acquisition of make-up brand Rhode, founded by Hailey Bieber, the daughter of actor Stephen Baldwin and wife of singer Justin Bieber. The deal is worth $1 billion, with $800 million at closing and up to another $200 million if the brand's sales grow over the next three years.

News of the deal led to a nearly 24% surge in e.l.f. Beauty to $111.24 per share on May 29. At least four analysts have since raised their target prices for the stock, according to MarketWatch data. For example, investment bank Jeffries upgraded its target price by 53% to $115 per share, while Baird's is now one of the highest, valuing the company at $145 per share, which implies 13% upside versus the close yesterday, June 12.

e.l.f. Beauty is far from the only company whose shares have soared on big names. On May 12, Gryphon Digital Mining, which calls itself a carbon-neutral bitcoin miner, announced a merger with American Bitcoin, a bitcoin accumulation platform whose founders include Eric Trump and Donald Trump Jr. Following news of the deal, Gryphon shares jumped 173%. 

On the same day, KindlyMD, a chain of clinics that, among other things, helps people with opioid addiction, announced a merger with Nakamoto Holdings, a bitcoin holding company founded by David Bailey, whom CNBC calls «Trump's crypto advisor.» In one day, KindlyMD added more than 250% in market value. 

In December, PSQ Holdings, which operates the «patriot marketplace» PublicSquare, along with a fintech project and hygiene products brand EveryLife, also tapped into the «Trump effect.» On December 3, the holding company announced that Donald Trump Jr. had joined its board. As a result, quotes soared 270%.

Elsewhere among small caps, «less-lethal» weapons maker Byrna Technologies has taken advantage of celebrity promotions, featuring, for example, Lara Trump, Donald Trump's daughter-in-law, journalist Megyn Kelly, and political activist and author Charlie Kirk. Thanks to these stars, the company has been able to raise both sales and margins, and in the last 12 months, Byrna stock has appreciated nearly 155%.

The appearance of celebrities in company news or prospectuses for IPOs makes it seem as if the celebrities' brands are attached to the companies, ensuring future returns, points out Freedom Finance Global analyst Georgy Timoshin. But the data shows the opposite, Timoshin says, having collected that data at Oninvest's request.

He studied 15 of the best-known «celebrity IPOs» over the past few years. Among them is 3D printer manufacturer Velo3D, invested in by tennis player Serena Williams, as well as Swedish food manufacturer Oatly Group, with investments from talk show host Oprah Winfrey, actress Natalie Portman, and rapper Jay-Z. 

The average cumulative return for stocks backed by celebrities post-IPO is barely above zero, as of May 20. The median return is minus 77%. This means half of the stocks have lost three quarters or more of their market capitalization since they started trading, Timoshin explains. The «wow effect» quickly fades – a year after the IPO the median return is already minus 50%. 

«A big name can attract attention and heat up trading interest, but cannot create sustainable growth or a medium-/long-term bullish trend,» says the Freedom Finance Global analyst. He adds: «Beyond the short-term hype period, it's not social media posts or the red carpet that drive the price, but fundamentals,» like the business model, margins, revenue growth, EPS, and free cash flow.

For example, weak financial performance has caused plant-based meat producer Beyond Meat to crater almost 93% since its 2019 IPO. Apparel and footwear retailer Allbirds has lost more than 97% since it went public in 2021. Both companies are backed by actor Leonardo DiCaprio. 

Yet there are some examples of the opposite. Shares of sports bookmaker DraftKings, in which basketball legend Michael Jordan has invested, soared about 288% since the company's IPO. Ride-hailing service Uber is up almost 104%, helped by a slew of celebrities, including Ashton Kutcher, Beyoncé, Jay-Z, Leonardo DiCaprio, Gwyneth Paltrow, Jared Leto, Olivia Munn, Edward Norton, and Lance Armstrong, wrote Forbes. For these companies, however, celebrity involvement is «just a nice complement to something that's already doing well,» Timoshin argues. 

Freedom Finance Global advises investors to use the backing of celebrities only as a short-term, news-based driver of a stock: «Buy the stock, catch the surge of interest, exit the position, without forgetting to place a stop-loss in advance.»

For those who want to «play roulette» with celebrities, Timoshin recommends looking at DraftKings, crypto exchange Coinbase (among its first investors was rapper Nasir Jones, known better as Nas), and Reddit (investments from Jared Leto and Snoop Dogg). All three firms operate in forecastable markets with clear growth drivers, says Timoshin. 

In a portfolio with a long-term investing horizon, the allocation to such investments should be minimal, «otherwise one or two losers will easily wipe out the profit of the rare winners,» Timoshin believes. The allocation should not exceed 1-2% of the portfolio (based on a venture fund model), while any purchases should be made using stop-loss orders and strict risk management techniques, Timoshin advises.