The comparatively young company e.l.f. Beauty is famous among younger generations thanks to low-price, high-value and cruelty-free cosmetics. Its stunning rise, disrupting the industry with bold innovation, has glossed its stock with a remarkable run, reflecting glamorous growth and consistent market share gains for years. After its peak, the stock fell by three quarters and has more than doubled again since then. After the latest earnings, shares surged by more than 20% as a big acquisition was announced. Is this a beautiful compounder to have an eye on?
Summary and key takeaways from today’s Weekly
– e.l.f. Beauty has made big waves – as a company, but also its stock.
– Despite the brutal correction from its all-time high, I do not see a reason to rush in now. Expectations are still high at a time where growth has slowed down noticeably.
– Overall, I like the story. But the stock made it “only” onto my watchlist for now.
This time, I want to start by quoting the CEO of the company we are going to have a look at today:
I’d like to put the strength of our results in the context of the broader beauty industry. While beauty has comparatively low barriers to entry, very few brands have been able to scale. Of the over 1900 cosmetics and skincare brands tracked by Nielsen, few have surpassed $25 million in annual retail sales. Even fewer have surpassed $100 million and e.l.f. Cosmetics is one of only four brands to achieve over $850 million in retail sales.
e.l.f. Beauty – CEO during the Q2 FY 2025 conference call (see here)
We are having here a company that has been growing extremely fast in a competitive industry, disrupting the beauty and cosmetics market through an innovative approach. And the company is profitable!
e.l.f. Beauty (ISIN: US26856L1035, Ticker: ELF) is a phenomenon. It’s stock is not less exciting, good for swings that are akin to entire bull and bear markets in comparatively short periods of time.
Let’s have an eye on this long-term compounder today.
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both as per 04 June 2025 market close – since August 2022
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Astronomic rise, brutal waterfall, massive rebound – an unvarnished look
e.l.f. Beauty was founded in 2004. It disrupted the cosmetics industry with affordable, high-quality but low-price and cruelty-free make-up (ingredients not sourced from animals and no animal testing).
The company went public in September 2016 at 17 USD per share. In only a handful of years, the stock multiplied several times and shot top up to 220 USD in 2024 (even twice) to become a famous ten-bagger, only to fall below 50 bucks in less than a year.
Since that low in April 2025, shares have more than doubled again in not even a couple of months. Definitively not a boring stock, that’s for sure.
Targeting a broad primarily female (though nowadays no one knows for sure) demographic, from teens to women in their 50s, e.l.f.’s core customers consist of Millenials (post 1980), Gen Z (post c. 1997) and Gen Alpha (the current gen, c. post 2013) with 35% consumer awareness among teens (see here), outpacing competitors.
Its success stems from a digital-first strategy connecting seamlessly to those who didn’t have the pleasure and freedom to grow up without a smartphone as well as innovative marketing (e.g., #eyeslipsface TikTok campaign with 10 bn. views). Another edge stems from rapid product development in just 20-week cycles.
This was not always the case, as temporarily the company and its stock were suffering.
The management was exchanged and the company rebranded and readjusted its strategy by closing its own shops, focussing on distributions through partners and its website (see here).
e.l.f. sells DTC (direct-to-consumer) via elfcosmetics.com and retailers like Target (ISIN: US87612E1064, Ticker. TGT) or Walmart (ISIN: US9311421039, Ticker: WMT). Recently, it went into a collaboration with Dollar General (ISIN: US2566771059, Ticker: DG) which is said to have seen a start above prior expectations.
The company offers over 600 vegan products.
This is insofar relevant as e.l.f. Beauty’s vegan products align with growing consumer demand for ethical, cruelty-free and sustainable cosmetics, appealing especially to eco-conscious Gen Z and Millennials. Vegan formulations avoid animal-derived ingredients, enhancing inclusivity and brand loyalty among these demographics. Paired with the digital marketing strategy, this is a powerful tool.
In comparison, typical makeup ingredients often contain animal-derived components like beeswax (lipsticks), lanolin (moisturizers from sheep), carmine (red pigments from insects) and gelatin (thickeners). Non-vegan products may also involve animal experiments and testing.
e.l.f. generates the bulk of its sales (80%) in the US, but it is expanding quickly internationally. Here in Germany for example, e.l.f. started last year by launching in selected Rossmann stores (for my non-German readers: a German drugstore and household staples chain that also has branches in Poland, see here).
Over the last two years, US sales doubled while they more than tripled internationally.
Overall, the pace is really, really high.
So high, that competitors could only lose. Among those, last year (see here) I already featured Estée Lauder (ISIN: US5184391044, Ticker: EL) where I correctly concluded that they will have to cut their dividend and that the stock should continue to fall rather hard. It is down 40% currently since my analysis.
But also industry heavyweight L’Oréal (Ticker: FR0000120321, Ticker: OR) looks like an amateur in comparison, despite not having crashed like EL.
Here’s a chart over the last three years.
Over the last more than four years, the stock of L’Oréal has done practically nothing.
Coming back to ELF, there’s a reason for why the stock has crashed so hard in just a matter of months. There are even two reasons.
The first is that sales growth has slowed down massively.
And this was even before the tariffs.
Growth companies in general do not like a noticeable slowdown as their often richly valued shares then are prone to correct. In the case of ELF, we can see that quarterly sales growth was for many quarters above 50%.
The last print was only less than 4%. Management while presenting strong growth figures for the calendar year 2024, was already guiding for a strong step on the brakes in early 2025 (with the company’s Q3 earnings, the fiscal year ends in March).
The stock dropped 20% under high volume.
Reason number two is that ELF sources about 80% of its products from China. In the past, this share was higher, in the future it is targeted to be lower. But it is what is at the moment: a big risk factor. In this regard, ELF has experienced higher costs through the tariff increases and on top became a victim of the high confusion and uncertainty surrounding this topic.
Last week, management said they’ll modestly up prices starting in August 2025.
Unfortunately, they pulled their guidance. Usually, this is a bad sign and stocks not seldom react negatively. In this case, though, ELF shares jumped more than 20%. Not due to the withheld outlook, but because ELF announced a big acquisition. ELF acquired Rhode, a high-growth DTC beauty brand, for a bn. USD (800 mn. USD upfront + 200 mn. USD potential earn-out).
The deal is being financed with 600 mn. USD in debt and 200 mn. USD in ELF’s stock. The latter results in a dilution of approximately 3%, so nothing dramatic.
However, the acquisition is insofar big as the price tag seems ambitious. Rhode – a celebrity brand – is said to have generated sales of 212 mn. USD over the last twelve months. Profitability was not mentioned but is not likely as this is a young company founded only a few years ago.
The balance sheet is okay, but not great. ELF prior to the deal and per last count had about 250 mn. USD in long-term debt and 160 mn. USD in net debt (though partly counting leasing).
The acquisition will now add 600 mn. USD, resulting in ~700 mn. USD net debt.
Is this much or little? In relation to FCF of a bit more than 100 mn. USD (and having the growth slow-down in mind), this is quite a chunk.
According to research firm Nielsen, ELF has seen 25 consecutive quarters of market share gains. This is an impressive streak. But such a deal at least casts some doubt about whether this was not a desperate move to reignite growth in times of headwinds.
We’ll likely only know in the future, but this was my first impression.
Coming now to the valuation of the stock. Starting with enterprise value to sales, it still looks like closer to the bottom of the historical range. But this and all other metrics are static. Adding the dynamic component – growth – a lower multiple is justified. Hence, I cannot draw a final conclusion from this one alone.
Above, I already showed the free cash flow which was 115 mn. USD. This figure was suppressed by negative working capital, but also pushed up by stock based compensation (SBC).
ELF is proud to let every employee be a co-owner, which is also a more novel and great approach. But it comes at a cost.
SBC is even a bit high for my taste.
While in accounting, SBC is added back up to earnings as it is a non-cash expense, as I have discussed in the past, it is also dilutive, respectively a kind of a hidden cost for shareholders if you want to put it this way. When stock options get exercised or shares granted, the company needs to issue new shares to pay their employees. Or they need to buy the shares beforehand from the market.
But in any case, this is the cash flow of shareholders that either is being used to keep share count stable or shareholders get diluted.
ELF currently has a market cap of ~6.4 bn. USD. Post-deal, the enterprise value will be likely towards 7 bn. USD, rather 7.2 bn. USD (debt and new shares). Sales were 1.3 bn. USD, growth has fallen asleep. So even an optimistic 10% free cash flow margin (higher than in the past, including higher costs, price increases, a weak economy and SBC), results in at best 150 mn. USD in my view.
7–7.2 bn. USD against 150 mn. USD is a very steep multiple of more than 45x. Even if we are more aggressive and use 200 mn. USD, we’ll arive at 35–36x free cash flow.
This is 50% too much for me. Now with the deal and debt, maybe even more.
In other words, the company is still priced for very high growth rates and flawless execution – even with aggressive, not conservative assumptions.
Management explained what they intend to do with Rhode and highlighted their “strong” balance sheet. For me, this is a clear case of “show me”. There’s no need to rush things through. We are practically having no margin of safety, but still high expectations.
Let’s not make the mistake to assume the all-time high was the reference point. This was a massive exaggeration.
I like the company’s development and I can imagine they’ll continue to gain more market share together with an aggressive international expansion. But we have risks from the valuation side, but let’s also not forget China and product sourcing. And the company is heavily TikTok-dependent for its marketing – this was also a politically-affected topic, though it has become silent in the recent past.
This name belongs on the watchlist as I do not see any immediate reason to act.
Conclusion
e.l.f. Beauty has made big waves – as a company, but also its stock.
Despite the brutal correction from its all-time high, I do not see a reason to rush in now. Expectations are still high at a time where growth has slowed down noticeably.
Overall, I like the story. But the stock made it “only” onto my watchlist for now.
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