e.l.f. Beauty currently trades at $96.77 and has been a dream stock for shareholders. It’s returned 220% since September 2021, more than tripling the S&P 500’s 70.6% gain. The company has also beaten the index over the past six months as its stock price is up 31.4% thanks to its solid quarterly results.
Is now still a good time to buy ELF? Or is this a case of a company fueled by heightened investor enthusiasm? Find out in our full research report, it’s free.
Why Does ELF Stock Spark Debate?
Short for "eyes, lips, face", e.l.f. Beauty (NYSE: ELF) is a developer of high-quality beauty products at accessible price points.
Two Things to Like:
1. Skyrocketing Revenue Shows Strong Momentum
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Luckily, e.l.f. Beauty’s sales grew at an incredible 37.9% compounded annual growth rate over the last three years. Its growth beat the average consumer staples company and shows its offerings resonate with customers.
2. Increasing Free Cash Flow Margin Juices Financials
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, e.l.f. Beauty’s margin expanded by 5.8 percentage points over the last year. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell. e.l.f. Beauty’s free cash flow margin for the trailing 12 months was 15.9%.
One Reason to Be Careful:
Shrinking Operating Margin
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Looking at the trend in its profitability, e.l.f. Beauty’s operating margin decreased by 4.4 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 7.2%.
Final Judgment
e.l.f. Beauty’s merits more than compensate for its flaws, and with its shares beating the market recently, the stock trades at 31.9× forward P/E (or $96.77 per share). Is now the right time to buy? See for yourself in our in-depth research report, it’s free.
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