The stock of e.l.f. Beauty (NYSE: ELF) fell 27.2% in September, according to data from S&P Global Market Intelligence. A fast-growing beauty brand taking market share from incumbents, e.l.f. Beauty rose to investor fame after accelerating revenue growth to nearly 100% in recent years. Now, it has revised its guidance downward for the upcoming fiscal year, leading investors to sour on the stock.
Here’s why shares of e.l.f. Beauty sank yet again in September.
With its cheaper products compared to the legacy players, e.l.f. Beauty has become a fan favorite among younger beauty shoppers in the United States and increasingly around the world. In the last 10 years, revenue has soared 431% and hit over $1 billion in the last 12 months.
In recent years, e.l.f. Beauty has posted revenue growth north of 50%. This is why the company’s price-to-earnings (P/E) ratio soared to 100 a few times in the last three years. Unfortunately, management now expects this growth to slow down. For the current fiscal year 2025, e.l.f. Beauty management is projecting revenue growth of 25% to 27%. This is still strong but much worse than in previous years and the reason why the stock fell this summer and into September.
Even worse, e.l.f. Beauty is growing its marketing spend at a faster pace than revenue, which is why profit margins are coming down. Generally, if you increase marketing spend at a faster rate than revenue, you should expect revenue growth to accelerate. This indicates inefficient spending from e.l.f. Beauty with its advertising dollars.
The big question for e.l.f. Beauty shareholders is whether it can keep growing revenue at a 20%+ rate beyond 2025. It has a minimal presence internationally, which could open up a huge market for the company. However, market share in the United States is already somewhat high, at 12.3% for the cosmetics category. It will be much harder to gain share from this level and drive revenue growth in its home market going forward.
Even worse, e.l.f. Beauty is not necessarily cheap after sinking so much in September. The stock has a P/E of 50, which is way above the S&P 500 average of 30, which in and of itself is extended. Taking this into consideration, it’s hard to rationalize buying the dip on e.l.f. Beauty stock unless you believe it can grow quickly for many years into the future.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends e.l.f. Beauty. The Motley Fool has a disclosure policy.
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