Does it make sense to buy stocks that have already delivered incredible gains? That's an important question investors are always thinking about. Is it too late to buy, or is there more coming?
An example is e.l.f. Beauty (ELF 1.05%) stock, which is up 75% over the past year, and is seriously outperforming the market. It's demonstrating tremendous resilience despite the inflationary environment, and it looks like there's plenty of gas left in its tank. If you buy shares today, I think you can expect them to double and go even higher.
The new standard in cosmetics
e.l.f. is the modern response to age-old beauty needs. It brands itself as disruptive, positive, and inclusive, "with heart." In other words, it's what resonates with today's millennial and Gen Z consumers. It also prices itself to meet mass demand. Altogether, it has built a formidable and distinctive cosmetics empire that's just getting started.
Many beauty companies are reporting pressure and declines. e.l.f. continues to skyrocket. In the 2024 fiscal fourth quarter (ended March 31), sales soared 71% over last year, with strong growth in both the wholesale business and e-commerce channels. Even more, sales growth has been accelerating over the past two years, while almost every similar company is slowing or reporting decreasing sales. e.l.f. has an edge with its lower prices, which attract more spend when shoppers have lower budgets but need their beauty fix.
Gross margin expanded to 71% in the first quarter, driven by a mix of drivers such as lower transportation costs and currency fluctuations in its favor. There was a decline in net income from $16.2 million last year to $14.5 million this year, but adjusted net income, which excludes costs related to its recent acquisition of skincare company Naturium, was $30.8 million.
Management is expecting sales growth to decelerate next year, guiding for a 21% sales increase in 2025, and a similar increase in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). It's expecting a slight increase in adjusted net income.
The future looks beautiful
If you invest now, you're investing in e.l.f.'s potential to keep up its strong performance. There are many reasons to be confident about the future, even if it may begin to experience some inflationary pressure in the near term.
Low prices is one way e.l.f. is generating high demand. It's significantly cheaper than the competition, with an average product price of $6.50 versus $9.50 for similar brands, and other drugstore brands are losing market share while e.l.f. has been gaining.
It's also making a big push to find customers on the channels where they're hanging out. The company creates videos with product drops and posts them on sites like TikTok, with product drops selling out within minutes.
e.l.f.'s positive, on-target messaging helps it stand out from the competition, and it's developing strong relationships with loyal fans. It's the No. 5 cosmetics brand in market share with 6.6%, and it sees a significant opportunity to increase that. Management is heavily investing in disruptive and innovative marketing that its customers love, which sets it apart, and it's increased its marketing spend from 7% of sales to 25%.
NYSE: ELF
Key Data Points
One area with major upside is skincare. Overall skincare industry consumption increased 2% in the first quarter, while e.l.f. skincare sales increased 38%. However, it's still only ranked No. 11, and this is an area where it can grow and capture market share.
International is another strong growth driver. International sales increased 115% year over year in the fourth quarter, and e.l.f. is just getting started in global sales, with only 16% global penetration
Finally, it has a strong pipeline of new brands and products that give it a wide-open runway, such as the recent Naturium acquisition.
Low-priced products, but a high-priced stock
Investors may appreciate how e.l.f. is building a thriving business on low prices, but they aren't thrilled with e.l.f. stock's price right now. e.l.f. stock trades at a price-to-earnings ratio of 82, the standard valuation metric, and it's expensive by most valuation ratios.
e.l.f.stock gets a premium for its incredible growth and steady profits. There's the possibility that some of that is already built into such a high price, but there's so much more coming. Wall Street sees a modest 12% gain over the next 12 to 18 months, but e.l.f. should reward patient long-term investors.
