Shares of cosmetics company e.l.f. Beauty (ELF -3.42%) were up 15% in May, according to data provided by S&P Global Market Intelligence. The stock had been dropping in 2024 because investors feared a slowdown in consumer spending in the sector. But the company pleasantly surprised them on May 22 with its financial results for its fiscal fourth quarter of 2024.
It was an admittedly uneven reaction from investors. When e.l.f Beauty first reported fourth-quarter results, the stock was actually down in after-hours trading. But when the market opened, the stock surged ahead and carried it to its big gain in May.
This reaction suggests that there were positives and negatives with e.l.f. Beauty’s report. On the negative side, management said that it expects around $1.2 billion in net sales in its fiscal 2025 (which started in April). That would represent a solid year-over-year growth rate of about 21%. That said, this represents a significant slowdown from its 77% growth in fiscal 2024.
Still, investors ultimately saw enough in e.l.f. Beauty’s fourth-quarter report to bid the stock higher anyway.
Why investors love this stock anyway
For context, e.l.f Beauty has nearly tripled its revenue in only the last three years. So 21% expected growth on top of this enormous rise in recent years is impressive. Moreover, the company growth is profitable on a net-income basis, which is rare.
ELF revenue (TTM) data by YCharts. TTM = trailing 12 months.
Keep in mind that at a 21% growth rate, e.l.f. Beauty would double its sales again in under four years, which is respectable for any growth stock.
I believe investors are most encouraged with e.l.f. Beauty’s growth rate because of the backdrop. More established players such as Ulta Beauty are growing at a single-digit rate, citing a general slowdown for cosmetic spending after a couple of years of abnormally high increases.
While growth is slower, e.l.f. Beauty appears to be taking market share, which is why the stock was ultimately up in May.
Strong execution but high expectations
Thanks to shrewd viral social-media marketing, e.l.f. Beauty has quickly come on the scene and become a billion-dollar business. The question for me is whether this company truly has a sustainable secret sauce or whether another start-up could come in and replicate its success.
I believe investors should be asking questions like this because the valuation of e.l.f. Beauty stock is rich. Whereas its price-to-sales (P/S) valuation has soared in recent years, the valuation for Ulta Beauty has dropped to downright reasonable levels.
ELF PS ratio data by YCharts.
If e.l.f. Beauty can successfully and sustainably keep taking market share, then it will likely wind up being the better long-term investment, despite its richer valuation today. That said, Ulta Beauty stock can be a good investment with much more modest growth because its shares are so much more reasonably valued.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Ulta Beauty and e.l.f. Beauty. The Motley Fool has a disclosure policy.