E.l.f. Beauty(NYSE: ELF) stock has crushed the market over the past three years, gaining 232% versus 32% for the S&P 500. That includes disappointing results this year -- shares of the cosmetics maker are down 28% in 2024, while the broader market is up 26%.
Why is e.l.f. suddenly out of favor? It's mostly due to short-term factors. Investors should ignore the noise and focus on the massive long-term opportunity. Here are three reasons e.l.f. stock looks like a fantastic buy right now.
1. Customers are crazy about it
E.l.f. has developed a strong brand that's getting customers excited. It focuses on social media, being eco-friendly, and having a message, aiming "to be a bold disruptor with a kind heart."
For example, it recently released an impact report stating that it is the only U.S. public company with a board that has more than 78% women and is 44% diverse. These are qualities that matter to the young cosmetics buyers it's targeting, and this demographic is lapping it up.
It positions itself as a low-cost producer, offering "dupes" of luxury brands for a fraction of the cost. That's something companies often try to hide, but e.l.f. is proud of being able to offer customers excellent products at an accessible price point. Its average product costs $6.50, while for other mass brands it's $9.50, and luxury brands top $20.
That's another reason it has been so incredibly successful over the past few years, while many other companies are struggling with inflation. Customers are switching down, and they're switching to e.l.f.
The results have been outstanding. Sales increased 40% year over year in the fiscal 2025 second quarter (ended Sept. 30), and that was its lowest year-over-year increase in eight quarters. The gross margin expanded 0.4 percentage points to 71%, and adjusted earnings per share (EPS) came in at $0.77, handily beating Wall Street expectations of $0.43. Management raised its full-year guidance from a 26% year-over-year sales increase to 29%, and EPS from about $3.38 to $3.50.
E.l.f. stock had been falling this year as it reported lower earnings. It's recycling back its profits into the company's marketing efforts and a recent acquisition for its skincare lineup. The market tends to be wary when it looks like a company has to pump back in too much money to generate sales. It jumped after the phenomenal report, but it's still down this year.
2. It's only going to get better
E.l.f.'s drop this year reflects short-term thinking. This is a brand that's completely changing the cosmetics scene, and its rise is far from over. It's the top brand among several different age cohorts, and it's capturing market share across demographics. The color cosmetics industry lost 5% in the second quarter, while e.l.f. sales were up 13%, and it was the top brand in unit share.
E.l.f. is the top most productive brand at Target, Walmart, Ulta Beauty, and several other stores. Both Target and Walgreens are opening up more shelf space for e.l.f. in the coming months.
The company is also growing its membership, and that has positive long-term implications. Membership increased 30% year over year in the second quarter to 5.3 million. Members buy more often, with higher average orders, and have a higher customer retention rate. They're also a rich source of data for accurate merchandising and innovation.
The brand is expanding wildly in international markets. Penetration outside the U.S. increased from 16% to 21% in the second quarter, and international sales increased 91% over last year. E.l.f. keeps striking new deals in international markets, and it's already the top-selling brand in some of its international locations, like Rossmann stores in Germany and Douglas stores in Italy.
3. The price is right
E.l.f. stock had become very expensive before its drop this year, but it's looking like a good deal now, even with its post-earnings jump. It trades at a forward-one-year P/E ratio of 24, below its three- and five-year averages. E.l.f. stock is likely to rebound in a big way and crush the market over the next few years, and now is an excellent time to buy.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target, Ulta Beauty, Walmart, and e.l.f. Beauty. The Motley Fool has a disclosure policy.
