Technology stocks are the undisputed leaders of growth stocks, but it would be a shame if investors missed out on other growth stocks because they weren’t looking in the right places. If you wear makeup, there’s an amazing stash that can literally be right under your nose: elf Beauty(NYSE: ELF). If you’re not wearing makeup, tear yourself away from the computer chips for a moment to take a look.
Wall Street doesn’t always have a consensus on a stock, but here it does. 13 out of 17 analysts call it a buy, and the other four call it a hold. None of them expect the price to drop. The lowest price target for eleven stocks is 15% higher than today, and the highest is 120%.
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A large consumer goods stock could have an edge over a large technology stock – just ask Warren Buffett. elf is building a strong brand and is gradually gaining market share. Let’s take a look at why this stock is up 240% in the last three years and why it could boost your portfolio.
elf is carving out a niche as a mass brand for the modern beauty lover. It uses social media to promote its low-priced beauty products, including cosmetics, skin care and hair care, and shoppers are drawn to its differentiated branding and innovative marketing touting its eco-friendly formulas.
Revenue rose 50% year over year in the first fiscal quarter of 2025 ending June 30, 2024, an incredible performance under pressure. However, it was still a slowdown compared to previous quarters. For a time, Elf benefited from customers switching to mass-market beauty products from expensive, luxury lines. That appears to be declining and management expects full-year growth of around 26%. That implies an even bigger slowdown in the next three quarters.
It also reported sluggish profits, with net income declining year over year. Management is investing in its digital marketing campaigns, which form the backbone of its differentiated social media approach and support its relationship building strategy. The company is also still rolling out its recently acquired skincare brand Naturium, which will impact profitability in the near term.
These are short-term factors. Smart investors will recognize that the long-term prospects for eleven are extremely attractive. Despite the challenges at the moment, Eleven is gaining market share in all its segments, with a 2.6 percentage point increase in color cosmetics market share in the first quarter, while many market leaders lost market share.
It has already carved out a niche in color cosmetics, where it is gaining traction, and the opportunities are even greater in skin care. The company gained 0.6 percentage points of market share in the first quarter and rose from thirteenth place last year to ninth place this year, but it still only has 2% of the market. Naturium contributed 16 percentage points to Elf’s sales increase in the quarter. It is also taking advantage of international opportunities, where sales increased 91% year on year. It recently launched or expanded deals in Mexico, Germany, Italy and several other countries.
elf shares are down 24% this year. However, the positive for new investors is that the valuation of elf stocks has fallen from astronomical levels. It currently trades at a one-year price-to-earnings (P/E) ratio of 24, which is reasonable for a fast-growing stock. It does deserve a premium for its chances, but unsurprisingly the stock has fallen under the current pressure.
Elf could continue to report pressured earnings, but management expects an increase for the full year. Expectations were raised in the first quarter, and moderating inflation could help exceed expectations.
In the longer term, elf is well positioned to continue to grow and capture more market share, launch new products and rise in the cosmetics rankings. If you’re looking for a growth stock with huge long-term potential, elf is an excellent choice.
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*Stock Advisor returns October 28, 2024
Jennifer Saibil has no positions in any of the stocks mentioned. The Motley Fool holds and recommends positions in Eleven Beauty. The Motley Fool has a disclosure policy.
1 Hypergrowth Stock That Has 120% Upside Potential, According to 1 Wall Street Analyst was originally published by The Motley Fool
