While the COVID-19 pandemic undeniably represented a catastrophe for multiple industries, the comeback from the crisis has also contributed to a demand bounce-back effect. That might be the case for cosmetics and skincare product provider e.l.f. Beauty (NYSE:ELF). Since the start of the year, shares have gained 32.6%. With fears of the virus fading (if not gone completely), combined with the company’s alignment with contemporary values and its high revenue growth, ELF stock could rise even more. Therefore, I’m bullish on ELF stock.
Normalization Trends Shine on ELF Stock
A major component of the skepticism surrounding ELF stock when the pandemic first capsized the global economy centered on relevancy. With people sheltering in place, there wasn’t much need for cosmetics. Without people working remotely from home in their pajamas, the emphasis on physical appearances took a backseat. Now, with normalization trends in full swing, e.l.f. has been accruing the benefits.
Over the trailing one-year period, ELF stock gained 82%. Over the past five years, it’s up a stunning 1,710%. With performance stats like these, it’s inevitable that some investors will question the upside narrative. Market gravity will eventually take over. Still, the sustained upside argument seems to hold more water.
That’s because the hard data points in a direction fundamentally favorable to ELF stock. For example, let’s take a look at air revenue passenger miles from the U.S. Bureau of Transportation Statistics. In April 2020, this metric fell to a shocking all-time low. With airports turning into ghost towns during the worst of the COVID-19 crisis, few people risked traveling.
However, the latest read shows that air passenger miles have recently hit a record high. This indicates that people are willing to travel more, which makes sense. Following the revenge travel phenomenon, travel prioritization – where consumers focus on experiential expenditures – has taken hold.
Logically, people want to look good while they’re vacationing, which should benefit the cosmetics industry. In turn, ELF stock should see continued gains in its share price.
Now, it’s true that e.l.f. plies its trade in a competitive ecosystem. However, one critical distinguishing attribute is e.l.f.’s business ethos. It has forged a strong reputation for supporting various causes, including animal welfare, women’s rights, and social and relational equity. As evidence, e.l.f. sponsored the only female competitor – Katherine Legge – for this year’s Indianapolis 500 motor race.
Doing good matters, particularly for young workers who value companies that carry out their sustainability and equity initiatives.
The Numbers Say It All
Of course, it’s one thing to talk about corporate advantages. It’s another to demonstrate it through objective means. Fortunately, with ELF stock, prospective investors can consult the hard numbers.
According to Grand View Research, the global cosmetics market size reached a valuation of $295.95 billion last year. Experts project that by 2030, the sector could be worth $445.95 billion. If so, that would translate to a compound annual growth rate (CAGR) of 6.1% from 2024.
Interestingly, in Fiscal 2019, e.l.f. posted revenue of $282.85 million. In Fiscal 2023, this figure stormed to $1.024 billion. This enormous run translates to a CAGR of 37.94%.
Moreover, Wall Street analysts, on average, anticipate that for the current Fiscal Year 2025, sales may reach $1.28 billion. By the following year, the top line could expand to $1.51 billion. Assuming that to be the case, the cosmetics specialist could enjoy a CAGR of 21.67%. That’s a noticeable slowdown from nearly 38%. Nevertheless, it’s a much higher growth rate than the underlying industry.
We can’t end the story there, though. The most optimistic expert believes that revenue could hit $1.66 billion by the end of Fiscal 2026. It’s not a ridiculous projection, and if that were to materialize, we would be looking at a CAGR of 27.57%.
Either way, analysts expect e.l.f. to have a substantial impact on the cosmetics industry. Therefore, ELF stands on viable ground.
Hot Valuation Must be Contextualized
Obviously, no investment is perfect. For ELF stock, one of the main criticisms is that it’s overheated. Right now, shares trade at 10.8x trailing-year revenue. The household and personal products sector trades at 1.74x sales. Nevertheless, the hot premium needs to be put into context.
Yes, ELF stock is overvalued on paper. However, looking back over the past four years, the underlying company’s revenue expanded at a CAGR of almost 38%. As a consensus view, it’s projected to increase over the next two years by nearly 22%. No matter how you look at it, e.l.f. is demolishing the cosmetics space.
Given that a Fiscal 2025 sales target of $1.28 billion is probably realistic based on past performances, assuming a share outstanding count of 55.94 million, ELF stock is trading around 8.37x projected sales. That’s still hot. However, it also gives you an understanding of how ELF can grow into its valuation.
Given how much the company is dominating its sector, one could argue that it’s contextually undervalued or, at the very least, a compelling deal.
Is e.l.f. Beauty Stock a Buy, According to Analysts?
Turning to Wall Street, ELF stock has a Strong Buy consensus rating based on nine Buys, three Holds, and zero Sell ratings. The average ELF stock price target is $202.50, implying 4.8% upside potential.
The Takeaway: The Return to Normal May Keep Fueling ELF Stock
With social circumstances going back to the pre-pandemic paradigm, the framework couldn’t be more powerful for ELF stock. Notably, e.l.f. is dominating the cosmetics sector, in large part due to its focus on sustainability and equity. Analysts see more growth ahead, and based on recent performances, it’s difficult to doubt the company. As a result, what looks like an overvalued profile could be an enticing upside opportunity.
