Despite a stellar first half of the year, E.l.f. Beauty (NYSE:ELF) has seen its stock fall by over 40% since its peak due to a deceleration in growth, sparking investor concerns over its future trajectory. However. E.l.f. recently reported its 23rd consecutive quarter of market share gains in Q2 of fiscal 2025, increasing its U.S. cosmetics market share by 195 basis points. This fueled a remarkable 40% revenue growth, exceeding expectations.
In this article, I'll dive into E.l.f. Beauty's recent performance and the reasons behind its valuation reset. I'll cover how the company's marketing strategies have helped it build a moat, examine its financials, discuss the risks, and review the current valuation to explain why I see this pullback as an opportunity for long-term investors.
E.l.f.s Momentum and MarketingE.l.f. is a highly competitive beauty brand, one that strategically offers affordable cosmetics and skincare to an enthusiastic customer base, particularly among Gen Z, thanks to an outstanding marketing team and smart retail partnerships.
However, E.l.f.'s year has been anything but steady. After a 60% gain in the first half, it saw a dramatic 40% drop in its stock price, largely driven by concerns over decelerating growth. The macroeconomic environment has added to these challenges, with fears of potential recessions and economic shifts in key markets like the U.S., Europe, and China. Investors tend to be wary of consumer discretionary stocks during times of economic uncertainty, as these are usually the first areas where consumers cut spending. However, with an anticipated easing of economic pressures and an improving consumer outlook, I see E.l.f. as well-positioned for growth in the coming years.
Also, E.l.f. is disrupting the market with new and developed products. The brand is 100% vegan and cruelty-free, aligning with the values of its target demographic, particularly younger, socially conscious consumers.
Beyond its products, E.l.f.'s strength lies in its marketing. Known for being an early adopter of platforms like TikTok and Roblox (NYSE:RBLX), E.l.f. continually redefines digital marketing in beauty. Its campaigns have made it a standout among Gen Z, and its marketing team is known for its forward-thinking approach. For instance, E.l.f. was the first beauty brand to launch interactive commerce on Roblox, with over 14 million plays on its branded Roblox experience. Strategic collaborations and user-generated content further enhance its appeal. By seamlessly blending high-impact campaigns with a sense of community and inclusivity, E.l.f. has forged a unique place in the market that goes beyond mere product promotion. Through these campaigns, the company has expanded internationally, with 21% of sales in Q2 2025 coming from outside the U.S. It now holds the top market position in Germany, the Netherlands, and Italy.
The MoatIn a sector with low barriers to entry, it's often difficult to assess a company's true competitive advantage. In my view, a brand's ability to maintain high margins without heavy discounting is a sign of strong customer loyalty. E.l.f.'s gross margins, sitting above 70%, demonstrate its pricing power and connection with consumers who seek quality at accessible prices. In the cosmetics industry, stable margins are a strong indicator of brand loyalty, as they show the company can maintain full price points without resorting to discounts. E.l.f.'s ability to keep margins high while growing market share reinforces its competitive edge.
Moreover, E.l.f. has embraced a masstige modelprestige products for the mass market. Its premium image allows for favorable pricing while remaining accessible to a wide audience. Despite this premium perception, E.l.f. retains its mass-market appeal, attracting consumers from Gen Z to older demographics alike.
Source: Gurufocus
E.l.f. is also a founder-led company, with a culture of employee ownership that aligns its workforce with shareholder interests. Each year, employees are granted equity, which fosters a sense of purpose and incentivizes them to drive growth. This approach motivates employees to work towards the company's success, as it directly impacts their compensation.
Of course, this can be viewed as a drawback as increases stock-based compensation (SBC), however, E.l.f. has managed it prudently so far. SBC as a percentage of revenue is only around 5%, and the year-over-year (YoY) dilution remains minimal at approximately 2%. The company has authorized a $500 million share repurchase program to help manage dilution over time.
FinancialsFinancially, E.l.f.'s growth trajectory is robust, with quarterly sales consistently exceeding prior year numbers. For fiscal 2024, quarterly sales growth surpassed 70% YoY, though this pace has normalized to a sustainable 40% in the last quarter. The company's 40% net sales growth in Q2 2025 was largely driven by U.S. market share gains and a 91% increase in international sales.
Source: E.l.f.'s investor presentation
E.l.f.'s recent growth has been fueled by substantial investments in inventory, marketing, and digital initiatives. This focus on growth has impacted short-term profitability, but I view it as essential to support long-term market positioning. Free cash flow dropped to $10 million this quarter, down from $26 million the previous year, as funds were directed towards enhancing manufacturing capabilities, expanding distribution networks, and strengthening the company's digital infrastructure. E.l.f.'s acquisition of Naturium has also bolstered its skincare portfolio, with the brand gaining significant traction, especially following a distribution deal with Ulta Beauty (NASDAQ:ULTA).
E.l.f. raised its fiscal 2025 revenue outlook in both Q1 and Q2. The company expects FY 2025 revenue to range from $1.311 billion to $1.331 billion, up $30 million from its previous outlook, representing 28% to 30% growth. Margins should also improve with planned international price increases and cost-saving initiatives across the board, though higher transport costs will place slight pressure on profitability.
RisksThe beauty industry is a highly competitive sector with constantly evolving trends, which E.l.f. must keep pace with to maintain its edge. This dynamic market can quickly shift consumer preferences, requiring E.l.f. to stay agile and continuously innovate to stay relevant.
E.l.f. relies on China for about 80% of its manufacturing needs, making it vulnerable to supply chain disruptions, tariffs, and geopolitical tensions. E.l.f. is working to mitigate this by having diversified already approximately 20% of its manufacturing sourcing spread across the U.S., Mexico, and Indonesia.
Another potential concern is the CEO's substantial share sales since 2019. While stock sales by executives are common, the CEO's holdings have decreased from nearly 6.4 million shares (approximately 12.8% ownership) to about 1.6 million shares over this period (representing only about 3% ownership), potentially raising questions about his confidence in the company's long-term growth.
ValuationWith the recent pullback in E.l.f.'s share price, I see an appealing entry opportunity, viewing this valuation reset as a healthy correction. E.l.f. is still trading at a premium but it is the only one disrupting the market and growing at double digits. I compared E.l.f. to larger beauty brands, particularly L'Oreal (LRLCY), which has the highest growth rate among its peers outside of E.l.f. itself. While L'Oreal's projected revenue growth is approximately 5% over the next few years, E.l.f. is expected to grow by over 20%, justifying its premium.
Source: Author
Currently, E.l.f. trades at a price-to-sales (P/S) ratio of 5.6x, with a forward P/S of 4.7x. Although its current price-to-earnings (P/E) ratio stands at 65x, its forward P/E of 32x aligns better with growth company standards.
E.l.f. is not optimized for FCF as it currently investing heavily in future growth. Since an FCF model is not appropriate, I used a multiples-based approach, valuing E.l.f. at approximately $182 per share, representing a 50% potential upside. This estimate is based on a justified EV/EBITDA multiple of 17x. Given E.l.f.'s current 21x multiple and its peer average of around 14.5x, I believe a 17x multiple is appropriate.
Source: Author
My final takeE.l.f. Beauty's recent valuation reset creates an attractive setup for long-term investors who believe in the brand's potential for sustained growth. Despite a 40% pullback in its share price, the company continues to demonstrate solid fundamentals, high gross margins, and marketing strategies that resonate deeply with consumers. With strategic investments in place, E.l.f. has a compelling outlook for 2025 and beyond, making this pullback a potential buying opportunity for investors aligned with its vision.
This content was originally published on Gurufocus.com
