Does it make sense to buy stocks that have already delivered incredible gains? That’s an important question that investors always think about. Is it too late to buy, or is there more to come?
An example is elf Beauty (NYSE: ELF) shares, which are up 75% in the past year, significantly outperforming the market. Despite the inflationary environment, it is showing tremendous resilience and it appears there is still plenty of fuel left in the tank. If you buy shares today, I think you can expect them to double and go even higher.
The new standard in cosmetics
elf is the modern answer to age-old beauty needs. It labels itself as disruptive, positive and inclusive, ‘with heart’. In other words, this is what resonates with today’s millennial and Gen Z consumers. It also prices itself to meet mass demand. All told, it has built a formidable and distinctive cosmetics empire that is just getting started.
Many beauty companies are reporting pressure and decline. eleven continues to shoot up. In the fourth fiscal quarter of 2024 (ended March 31), sales increased 71% year-over-year, with strong growth in both wholesale and e-commerce channels. In fact, revenue growth has accelerated over the past two years, while almost every comparable company is slowing or reporting declining sales. elf has an edge with its lower prices, which attract more spending when shoppers are on a lower budget but need their beauty treatment.
Gross margin increased to 71% in the first quarter, driven by a mix of factors such as lower transportation costs and currency fluctuations in the company’s favor. There was a decline in net profit from $16.2 million last year to $14.5 million this year, but adjusted net profit, excluding costs related to the recent acquisition of skincare company Naturium, was $30.8 million.
Management expects revenue growth to slow next year, leading to a 21% increase in revenue by 2025, and a similar increase in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). A slight increase in the adjusted net result is expected.
The future looks beautiful
If you invest now, you are investing in eleven’s potential to maintain its strong performance. There are many reasons to be confident about the future, even if it may experience some inflationary pressure in the short term.
Low prices are one way Elf generates 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 Elf is gaining.
The company is also making a big effort to find customers on the channels where they hang out. The company creates product drop videos and posts them on sites like TikTok, with product drops selling out in minutes.
elf’s positive, purposeful message sets elf apart from the competition, developing strong relationships with loyal fans. It is the fifth-largest cosmetics brand in terms of market share with 6.6%, and it sees a significant opportunity to increase that. Management is investing heavily in the disruptive and innovative marketing that its customers love and that differentiates the company, and it has increased its marketing spend from 7% of sales to 25%.
One area of ​​great benefit is skin care. Total skin care industry consumption rose 2% in the first quarter, while sales of eleven skin care products rose 38%. However, it still only ranks eleventh, and this is an area where it can grow and gain market share.
International is another strong growth driver. International sales increased 115% year over year in the fourth quarter, and eleven is just getting started with global sales, with global penetration of just 16%
Finally, it has a strong pipeline of new brands and products that give it a wide runway, such as the recent acquisition of Naturium.
Low priced products, but expensive inventory
Investors may appreciate that Elf is building a thriving business at low prices, but they are not happy with the price of Elf stock at the moment. Eleven shares trade at a price-to-earnings ratio of 82, the standard valuation metric, and are expensive by most valuation ratios.
elfstock gets a premium for its incredible growth and steady profits. There’s a possibility that some of that is already built into such a high price, but there’s so much more to come. Wall Street sees a modest gain of 12% over the next twelve to eighteen months, but the eleven should reward patient, long-term investors.
Should you invest $1,000 in Elf Beauty now?
Consider the following before purchasing shares in elf Beauty:
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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.
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