I recently encountered an unfamiliar term, "stealth wealth." After some research, I learned that it describes how people wear luxury clothes or accessories without explicitly donning vibrant colors, patterns, or logos that are instantly linked to specific brands. In other words, it's high-end fashion that's muted.
And stealth wealth can apply to anyone, not just celebrities or rich people. While clothing is an obvious luxury outlet, there are other items that consumers flock toward. In this article, I'll explore the booming beauty industry where companies like Ulta Beauty, LVMH Moët Hennessy, and L'Oréal tend to dominate the headlines.
Yet, there is one under-the-radar company I think could be the biggest winner of them all: e.l.f. Beauty (ELF 2.04%). Let's see why it could be the hidden gem of the beauty market.
Is the beauty industry really that big?
Right off the bat, it might seem like beauty is a niche industry. Not everyone uses cosmetics, which are not considered a necessity like food. One thing to keep in mind, however, is that the beauty industry is global.
In December, research firm Statista published a report on the worldwide cosmetics market. It broke down the beauty industry into four categories: cosmetics, personal care, skin care, and fragrances. Statista's research suggests that the global total revenue from the beauty industry was $528 billion in 2022 and is expected to grow to $571 billion by the end of 2023.
Personal care accounts for over 40% of the total market, the report says, but I found the growth in cosmetics to be particularly encouraging. In 2022, cosmetics generated total global revenue of $93 billion, or 18% of the global beauty market. And Statista predicts that by 2027, cosmetics will have a 19% share of this market.
Image source: Getty Images.
While a 100-basis-point increase over several years might seem mundane, keep in mind that this incremental growth would account for tens of billions of dollars of additional revenue.
For me, the biggest takeaway from this report was where this growth in the beauty industry is coming from now. The rising popularity of social media, particularly short-form video platforms like TikTok and Instagram, with the Gen-Z and millennial demographics is opening up a new form of consumer engagement.
To put this into perspective, Statista's data suggest that by the end of 2023, nearly 28% of all beauty products will be sold online, as opposed to in stores. This is a massive increase from just 2020, when Statista estimates 22% of beauty sales were online.
What makes this company so different?
Companies like Ulta and LVMH (through its subsidiary Sephora) compete for the same cohort of customers. Both companies sell similar luxury products and rely on a combination of in-store sales and online traffic to drive revenue. By contrast, e.l.f. sells its products into stores like Ulta, Target, Walmart, and CVS, and competes with other brands on the shelves.
In late May, e.l.f. released earnings for fiscal 2023, ended March 31 -- and they were very impressive. For fiscal 2023, e.l.f. increased its net sales by 48% to $579 million, and expanded its gross margin to 67%, up more than 3 percentage points year over year. The company attributed the increases in revenue and margin to strong demand in both retail and e-commerce settings, as well as pricing.
One stat I had to read twice was that e.l.f.'s sales in Ulta stores alone increased 70% in fiscal 2023, and the company did that without any extra shelf space. That alone should provide investors with the confidence that e.l.f.'s products are in high demand.
Moreover, during the earnings call, management said it is seeing huge success with social media, particularly TikTok. The company has run four different TikTok campaigns that have amassed over a billion views each, with its most recent reaching almost 15 billion views.
It's highly likely that social media is acting as a megaphone for e.l.f., generating high demand, thereby mitigating the need pay for additional shelf space.
Is the valuation attractive?
Currently, e.l.f. stock is trading at a near 52-week high and has eclipsed a $6 billion market capitalization. The forward price-to-earnings (P/E) ratio is roughly 63. By comparison, other beauty companies that sell products both online and in retail stores, such as L'Oréal and Estée Lauder, trade at multiples of 34 and 37, respectively.
It's obvious that investors are placing a premium on e.l.f. stock above its peers, but it appears warranted. It is a little challenging comparing top-line growth among this cohort because e.l.f., Estée Lauder, and L'Oréal all have different ending periods for annual results.
However, even with that said, Estée Lauder's latest annual report illustrates that it grew its top line by 9%, while L'Oréal grew it by 19%. These growth rates clearly lag e.l.f. by a significant margin, and might shed light as to why its competition has recently turned to multibillion-dollar acquisitions to help spark new business.
By contrast, e.l.f.'s industry-leading growth and popularity on social media show that consumers clearly are not bogged down by inflation regarding luxury products like makeup. It's possible that the company could be exposed to some momentum trading in the near term; however, as long as it continues to maximize social media and grow without overinvesting shelf space, the stock looks like a clear long-term winner.
A prudent approach for investors should be to dollar-cost average into e.l.f. stock over time.
