Over the past six months, e.l.f. Beauty’s stock price fell to $77.27. Shareholders have lost 10.9% of their capital, which is disappointing considering the S&P 500 has climbed by 6.2%. This might have investors contemplating their next move.
Given the weaker price action, is this a buying opportunity for ELF? Find out in our full research report, it’s free.
Why Does e.l.f. Beauty Spark Debate?
Short for "eyes, lips, face", e.l.f. Beauty (NYSE: ELF) is a developer of high-quality beauty products at accessible price points.
Two Things to Like:
1. Skyrocketing Revenue Shows Strong Momentum
A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, e.l.f. Beauty’s sales grew at an incredible 41.4% compounded annual growth rate over the last three years. Its growth surpassed the average consumer staples company and shows its offerings resonate with customers.
2. Elite Gross Margin Powers Best-In-Class Business Model
At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.
e.l.f. Beauty has best-in-class unit economics for a consumer staples company, enabling it to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an elite 71% gross margin over the last two years. That means e.l.f. Beauty only paid its suppliers $29.05 for every $100 in revenue.
One Reason to Be Careful:
Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Looking at the trend in its profitability, e.l.f. Beauty’s operating margin decreased by 7.5 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 4.5%.
Final Judgment
e.l.f. Beauty’s positive characteristics outweigh the negatives. With the recent decline, the stock trades at 23.4× forward P/E (or $77.27 per share). Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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