It has been a wild week for e.l.f. Beauty(NYSE: ELF) shareholders. After rising earlier in the week along with the broad market, the stock dropped by 15% after the company posted second-quarter earnings. An affordable beauty brand, e.l.f. Beauty is posting strong growth and expanding rapidly internationally. However, its results were below Wall Street's expectations for the high-priced stock.
Here's why e.l.f. Beauty stock went on a roller-coaster ride this week.
Strong growth, international expansion
In the second quarter of 2024, e.l.f. Beauty put up more impressive growth numbers. Revenue grew 50% year over year to $324.5 million, with international sales up a whopping 91% as the brand expands outside of the United States. E.l.f. is gaining market share rapidly against the incumbent competitors and legacy beauty brands. The company is also quite profitable, generating $47.5 million in net income just in the second quarter. In the last five years, e.l.f. Beauty's revenue has grown at close to 300%.
So why is the stock down? Because investors had placed high growth expectations on the stock. The stock is up over 800% in the last five years and traded at a price-to-earnings ratio (P/E) over 80 before the recent price drop. The S&P 500 trades at a P/E of just 28, for reference. Investors have high growth expectations for e.l.f. Beauty, and clearly the company did not meet these expectations in the second quarter.
Time to buy the dip?
After this recent fall, e.l.f. Beauty trades at a cheaper P/E of around 70 and a forward P/E of 45. This still looks expensive, but e.l.f. Beauty could grow quickly to fulfill this earnings multiple.
The brand is growing market share in new regions such as the United Kingdom and Canada. It keeps attacking the legacy brands with cheaper price points on quality beauty products. Innovative marketing strategies on social media have led to continued gains in the United States. Unit volume growth for e.l.f. in the United States was 25% in the quarter compared to significant declines for all other major brands.
E.l.f. Beauty is a fast-growing company firing on all cylinders at the moment. If you believe this growth story will continue, now could be a good time to buy the dip on the stock after its recent earnings tumble.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends e.l.f. Beauty. The Motley Fool has a disclosure policy.
