How Perfect Corp. cashes in on virtual makeup and pretty selfies

Most investors have never heard of Perfect Corp., a developer of AI-based solutions for the beauty and fashion industries. Nevertheless, the company serves more than 400 of the world’s largest cosmetics brands, while its technologies are used by Instagram, Facebook, and Alibaba, and its apps have been downloaded by retail customers over a billion times, according to Zacks Small-Cap Research (Zacks SCR). Perfect Corp. dominates its niche, yet its shares are still undervalued, believe Zacks SCR analysts.

AI for makeup

Perfect Corp., a Taiwanese company, was founded in 2015, and in the almost nine years since, has managed to secure giants of the fashion and beauty industries as clients, including Estée Lauder, Shiseido, Chanel, and LVMH. It sells companies access to its AI and augmented reality (AR) technologies, which allow users to virtually try on products — from cosmetics and skincare products to watches.

For regular users, Perfect Corp. offers six subscription-based apps:

• YouCam Makeup: A set of virtual makeup tools, including a real-time AR makeup application and selfie retouch. According to Zacks SCR, it has the largest subscriber base and generates the most revenue for the company.
• YouCam Perfect: An AI-based photo-editing app with filters, frames, stickers, and more.
• YouCam Video: A selfie video editor that allows users to apply makeup, change their hair color, and add beauty filters. These videos can then be uploaded to TikTok, YouTube, Instagram, and Snapchat.
• YouCam Enhance: An app for image-editing, object removal, background changes, and more.
• YouCam Nails: An app that enables users to try on manicures, add nail stickers, and create unique nail designs.
• YouCam AI Pro: A new Generative AI-powered app that can generate images in 20 artistic styles, like Van Gogh and anime.

For a work video call, the founder, CEO, and main shareholder of Perfect Corp., Alice Chang, appeared with pink lipstick, blush, and lilac eyeshadow, but the makeup was virtual. “It’s so convincing that no one on the other side of her video meetings that day will be the wiser,” the American Forbes said of one of the apps.

‘Godmother’ of virtual makeup

Unlike many other startups, Perfect Corp. initially had strong support in the form of access to technology and capital from big businesses. Before founding the company, Chang was CEO of CyberLink for 18 years. She cofounded it with her husband in 1996. CyberLink is known for its multimedia player PowerDVD and its facial recognition technology FaceMe.

When sales of PCs began to slow down, Chang started thinking about ways to expand the business and develop software for the growing smartphone market.

Chang loved taking selfies, but she found that there was not a good editor to retouch photos. In 2014, she created the first, free app, YouCam Perfect, which allowed users to “remove” pimples or dark circles from photos and “whiten” their teeth. In its first year, the app was downloaded 17 million times, without Chang spending any money to promote it. Shortly after, the second app, YouCam Makeup, was launched. The app allowed users to apply makeup and was also free.

At the time, Chang could not figure out how to monetize the success of her apps. But, eventually, an idea emerged. At first, Perfect Corp. was a division of CyberLink, before being spun off into a separate business in 2015. Chang hired 80 employees, mostly engineers, and started offering the technology to major cosmetic brands. She made 19 trips to New York, Paris, Tokyo, and Shanghai in a single year, according to Forbes. Her pitch to potential clients was simple: “If you try more, you buy more.”

Forbes calls Chang the “godmother” of virtual makeup. The company managed to attract $130 million in investments from Goldman Sachs, Snap, and Alibaba. Perfect Corp. integrated its AR makeup solution into Alibaba’s Tmall and Taobao platforms. Through a partnership with Alphabet, brands offered users virtual try-ons of their products on YouTube with interactive AR ads and on Google (when users searched for a product). Similar partnerships exist with Snap and Instagram.

In 2021, Perfect Corp. launched its first product for men, which allows them to shave and try on stubble, mustaches, and trimmed beards. More and more men want to experiment and take care of themselves, and cosmetic brands are responding by offering them care products, while Perfect Corp. provides “virtual experiments,” the company wrote.

Perfect Corp. aspires to become a one-stop shop for AR- and AI-beauty and fashion solutions. According to Zacks SCR, its clients include 18 of the 20 largest cosmetic brands, such as Estée Lauder, Sephora, Shiseido, and Avon. It also collaborates with international retailers Walmart and LVMH. This is a significant achievement for a nine-year-old company.

How Perfect Corp. trains its AI

Perhaps, brands like Chang’s idea because the personalized virtual recommendation service genuinely gives a boost to their sales. According to Clinique, people using the virtual try-on tool spend 4-5 times longer on the brand’s website and are 2.5 times more likely to make a purchase. After Clinique started offering virtual try-ons, its average order value grew 30%. Avon claims that thanks to Perfect Corp.’s solution, the conversion rate (the percentage of visitors who made a purchase) on its website soared 320%, with the average order value increasing 33%.

To build a database for training its AI, Perfect Corp. did not charge users for the makeup try-on app for the first two years. Instead, users provided their feedback and images. For selecting foundation shades, for example — where determining the exact skin tone can be difficult — AI analyzed images and eventually could suggest the correct tone for nearly 90,000 skin shades and 14 makeup textures. Later, the same technology was applied to apps that allow users to try on manicures and perform skin diagnostics. The skin analysis system can determine skin dryness and oiliness, as well as detect pimples, uneven texture, redness, wrinkles, and under-eye bags, the company says. To achieve that, the AI was trained on over 70,000 medical images selected by specialists.

By the end of 2017, Perfect Corp. had a platform with over 300 million users. That year, the company chose SaaS (Software as a Service) as its business model. This entails the provider developing software, deploying it on its own servers, and maintaining it, while the client essentially rents the software. Perfect Corp. began selling its SaaS to brands in 2018. The price for brands is fixed; the company does not receive a percentage of other brands’ sales, Zacks SCR notes.

What analysts are saying

On October 31, 2022, Perfect Corp. went public on the Nasdaq exchange through a merger with Provident Acquisition Corp. SPAC, bypassing the legally complex and costly process of a traditional IPO. In the deal, Perfect Corp. was valued at $1.02 billion. Investors included Chanel, CyberLink, Shiseido, and Snap.

Perfect Corp.’s top line grew 13.1% in 2023 to $53.3 million, mainly due to higher revenue from AI- and AR-cloud solutions, as well as subscription revenue (up 19.6% year-over-year). As of the end of March 2024, its YouCam apps had 902,000 subscribers, up 30% compared to a year earlier.

The company generates about the same amount of revenue from the B2B and B2C segments. It monetizes the same solutions in two separate markets, Zacks SCR writes, which increases return on investment and allows for testing a product in one market before it is rolled out in another.

Perfect Corp. guides for revenue growth of 12-16% in 2024. Where will it find the new sources of growth?

Recently, the company added skincare product selection to its lineup. The skincare market is three times bigger than the cosmetics market, Zacks SCR points out, while Mordor Intelligence expects the market to grow nearly 5% over the next five years. In July, Perfect Corp. announced a partnership with Japanese wig retailer NAO-ART. Now, NAO-ART customers will be able to virtually try on wigs, including medical ones.

AR technologies can be applied in plastic surgery, as well as in dentistry and orthodontics, Perfect Corp. writes. The company also believes that new opportunities are opening up in the metaverse, where consumers can try on and purchase brands in virtual spaces.

A potential constraining factor for Perfect Corp.’s growth could be the increasingly challenging economic environment. For example, the company’s first-quarter 2024 earnings indicated that in the period, 10 major clients did not renew contracts, partly due to “financial pressures.” Perfect Corp. now has 152 key clients. Another risk factor, according to the company, is constantly changing personal data protection legislation. Several Perfect Corp. brand clients are already facing class-action lawsuits for violating biometric data privacy, meaning the company might become a target of legal action or have to pay fines in the future.

Zacks SCR believes that Perfect Corp. stock is undervalued and it should be priced at at least $2.80 per share, versus the last closing price on July 16 of $2.29 per share. For one, the vast potential of AI is yet to be discovered, while Perfect Corp. has been using the technology for many years, with a database for AI training that includes billions of images, Zacks SCR analysts explain.

According to MarketWatch, one analyst covers the company. They recommend holding the stock, with a target price of $3.06 per share.