Back in June, e.l.f. Beauty 's (NYSE: ELF) stock closed at its record high of $218 per share. That marked a 1,353% gain from its IPO price of $15 in less than eight years. Instead of chasing higher-end consumers as L'Oreal and Estée Lauder do, the American cosmetics underdog carved out a high-growth niche by targeting younger shoppers with discount products, online sales, and clever social media campaigns. It also sold its products at more brick-and-mortar retailers, expanded internationally, and acquired the skincare brand Naturium last October.
But as of this writing, e.l.f. Beauty's stock has retreated by about 30% from its all-time high. Most of that decline occurred after it delivered its fiscal 2025 first-quarter report on Aug. 8. Though it posted an earnings beat, it followed that up with an underwhelming outlook for the rest of the year. However, I believe that this pullback might represent a promising buying opportunity for patient investors.
Image source: Getty Images.
How fast is e.l.f. Beauty growing?
From its fiscal 2019 to fiscal 2024 (which ended in March), e.l.f. Beauty's revenue increased at a compound annual growth rate (CAGR) of 31%. Its annual gross margin rose from 61% to 71%, while its adjusted earnings before interest, taxes, depreciation, and amortization ( EBITDA ) increased at a CAGR of 30%. It also turned profitable on a generally accepted accounting principles ( GAAP ) basis in its fiscal 2020, and its net profit increased at a CAGR of 48% from its fiscal 2020 to fiscal 2024.
Metric | Fiscal 2020 | Fiscal 2021 | Fiscal 2022 | Fiscal 2023 | Fiscal 2024 |
|---|
Revenue growth | 6% | 12% | 23% | 48% | 77% |
Gross margin | 61% | 65% | 64% | 67% | 71% |
Adjusted EBITDA growth | 0% | (2%) | 22% | 56% | 101% |
Data source: e.l.f. Beauty.
Like many of its industry peers, e.l.f. suffered a slowdown during the early part of the pandemic as people purchased fewer cosmetic products. Yet over the past four fiscal years, its top-line growth accelerated again and its margins expanded.
But at the time of the company's fiscal Q1 report, it predicted revenue would rise by 25% to 27% in fiscal 2025 and that its adjusted EBITDA would climb by 27% to 28%. Those updated estimates were both higher than the guidance it provided in the fourth quarter, but they still imply its growth will cool significantly over the next few quarters. The company's acquisition of Naturium last year also suggests it's pivoting toward seeking inorganic growth as its organic growth slows.
The high-growth days aren't over yet
That forecast deceleration rattled the bulls , but the company still has plenty of irons in the fire. Its international revenue soared 91% year over year in its fiscal first quarter, but that business segment only accounted for 16% of its top line. The company is gaining momentum in Canada, the U.K., the Netherlands, and Italy, and its expansion efforts internationally could gradually reduce dependence on its maturing U.S. market.
On the earnings call, CEO Tarang Amin said that its global peers in the cosmetics space on average already generate more than 70% of their sales internationally. E.l.f. could still have plenty of room to grow in countries like France, Saudi Arabia, and Australia.
The company's acquisition of Naturium also diversifies its portfolio and broadens reach beyond e.l.f.'s core market of Gen Z women. Naturium's skin care products are pricier, and more popular among millennials. Also, approximately 40% of its users are men.
Lastly, Target , e.l.f.'s longest-standing retail partner, expects its own sales to stabilize this year after a slowdown in 2023. E.l.f Beauty has been the top cosmetics brand at Target for six consecutive quarters, and its retail share rose from nearly 13% to more than 20% during that period. Therefore, Target's stabilization could boost e.l.f.'s U.S. sales.
It looks reasonably valued relative to its growth
From its fiscal 2024 to fiscal 2027, analysts expect e.l.f.'s revenue to rise at a CAGR of 21% as its adjusted EBITDA rises at a CAGR of 25%. With an enterprise value of $8.6 billion, the company still looks reasonably valued relative to those estimates at 6 times this fiscal year's sales and 28 times its adjusted EBITDA. It also recently approved $500 million stock-buyback plan.
Growth investors might be disappointed in e.l.f.'s recent slowdown, but its stock could still have plenty of upside potential. Investors who buy it as the bulls look the other way could be well rewarded over the next few years.
Leo Sun has positions in L'Oréal. The Motley Fool has positions in and recommends Target and e.l.f. Beauty. The Motley Fool has a disclosure policy .
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