To The Moon

$e.l.f. Beauty Inc.(ELF)$

e.l.f. Beauty just reported record quarterly revenue, yet its stock has plummeted 24% after hours to a new 52-week low. What’s happening with this stock, and is it a good buy right now?

When I first started analyzing e.l.f. stock, I was struck by its rapid rise. Back in 2022, shares were trading around $20, and by their peak in 2024, they had soared to nearly $200. That’s a 10x return in just a couple of years.

One key reason for this growth is that e.l.f. (which stands for Eyes, Lips, Face) is known for its affordable cosmetics. As the economy began to struggle in 2023, budget-conscious consumers started looking for cheaper alternatives to their favorite beauty products, and e.l.f.'s sales surged. The company's revenue really took off in 2023, and by 2024, it had surpassed $1 billion in annual sales.

Fast forward to today, and e.l.f.’s stock has dropped significantly from its highs. After-hours trading has pushed the price down to $67 per share. The stock began under performing around September 2024, and while I tend to avoid politics in my analysis, a key factor may have been the announcement of a new U.S. presidential candidate in late 2024—one who strongly supports tariffs and plans to impose them on China.

Why does this matter for e.l.f.? According to the company’s responsible sourcing policy, the majority of its products are manufactured in China. If tariffs increase, the cost of producing these budget-friendly cosmetics could rise, making them less affordable and potentially impacting profitability.

So, while tariff concerns may have driven the stock down, the big question remains: With record revenue and a steep decline in price, is e.l.f. stock a buying opportunity at $67 per share?

Earnings Report

Key Takeaway: e.l.f. Beauty has updated its fiscal 2025 outlook, lowering both revenue and profit guidance.

At first glance, the revision doesn’t seem too bad. The company now expects a 27-28% year-over-year increase in net sales, which is still strong double-digit growth. However, this is a slight downgrade from their previous 28-30% forecast—a reduction of just over 1%.

The real concern for investors, however, seems to be profits. While revenue estimates were only trimmed by about 1-2%, the company's full-year profit forecast was cut by around 6%. This suggests that tariff fears may already be impacting e.l.f., with the company anticipating higher costs and possibly struggling to pass those on to consumers.

e.l.f.'s success has largely been driven by its reputation as an affordable yet high-quality cosmetics brand. However, as the economy improves, consumers may shift back to higher-end beauty products. At the same time, if e.l.f. is forced to raise prices due to tariffs, it could lose its budget-friendly appeal—creating a perfect storm where the brand is no longer seen as a discount option while also facing increased costs.

That said, let’s keep things in perspective—27-28% revenue growth is still impressive. e.l.f. is not in decline, but its explosive growth phase may be slowing. That’s the key point to consider moving forward.

Valuation & Growth

e.l.f.’s stock is down 20% after hours, bringing its market cap to approximately $4 billion. That puts its price-to-annualized sales ratio at 3, which is relatively cheap—especially for a company with strong double-digit revenue growth and a 71% gross margin.

One concern I initially had was whether these margins were declining, but the latest earnings report shows that gross profit remains at 71%, meaning the company has maintained pricing power and efficiency.

Profitability Challenges

While e.l.f. boasts strong gross margins, it also spends heavily on advertising and celebrity endorsements—which significantly impacts profitability. Their selling, general, and administrative (SG&A) expenses make up 85% of their gross profit, leaving only 15% of that 71% margin available for the bottom line.

This means that e.l.f. is not a highly profitable company, and while investors tolerated that when growth was explosive, slowing growth has led to more scrutiny of its valuation.

Is e.l.f. Stock Still Expensive?

On a price-to-sales basis, e.l.f. looks cheap. However, on a price-to-earnings (P/E) basis, it remains relatively expensive. Before the drop, it was trading at 48x earnings, well above the market average of 30-35x. Even after the decline, it may not be a bargain by traditional valuation metrics.

Balance Sheet Strength

If you're considering buying the dip, it's crucial to ensure the company is financially stable. e.l.f.’s balance sheet looks solid:

• Current assets: ~$559 million

• Current liabilities: ~$294 million

• Current ratio: ~1.9x (indicating strong short-term financial health)

The company also has $200 million in long-term debt and lease obligations, which shouldn’t be a concern given its healthy cash position. Additionally, e.l.f. is not burning through cash—its cash balance has remained stable year-over-year.

Shareholder Dilution

One minor concern is share dilution. The number of outstanding shares has been increasing slightly over time, meaning existing shareholders own a slightly smaller percentage of the company. However, this level of dilution is normal for growth companies, as they often issue shares to fund expansions, acquisitions, or executive compensation.

Is e.l.f. Beauty’s Massive Drop Justified?

Now, back to the main question—is this selloff warranted? In my opinion, probably not. What we’re seeing here looks like a classic market overreaction.

When a stock reaches a high valuation, as e.l.f. did last year, investors become much more critical. A company that has 10x’d in just two years sets extremely high expectations, and any slight disappointment can trigger a major selloff. e.l.f. was priced for perfection, so even a minor guidance cut sent the stock tumbling.

That said, this could present a buying opportunity. However, there’s still uncertainty surrounding potential tariffs—they could have a bigger impact than expected, or they might not be as bad as feared. Given this unknown, if I were to start a position in e.l.f., I’d keep it small and use a dollar-cost averaging (DCA) approach, gradually investing over time to minimize market timing risks.

Growth Potential & Risks

Despite the selloff, e.l.f. is still a high-growth company, expanding internationally and maintaining strong brand recognition. The company claims to have only penetrated about 20% of the international market, suggesting a long runway for future growth.

However, cosmetics is a highly competitive industry, and expanding globally might not be as easy as they hope. While e.l.f. has a strong brand and loyal customer base, it will have to compete with established international players.

Conclusion

If you believe, as I do, that this selloff was an overreaction to a minor guidance cut, then this could be a chance to start dollar-cost averaging into the stock. e.l.f. is still a high-growth company with strong margins and a solid balance sheet, but its slowing growth and high valuation have raised concerns. Investors need to weigh whether the stock’s recent decline presents a buying opportunity or if further downside is possible.

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Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.