Shares of upstart cosmetics and skincare company e.l.f. Beauty(NYSE: ELF) dropped 12% in the last week as of 3:30 p.m. ET on Thursday, according to data provided by S&P Global Market Intelligence.
After the company guided for sales growth of only 25% to 27% in 2025 -- a far cry from 77% over the last year -- the market has sent e.l.f. Beauty's share price lower as it worries about decelerating growth rates.
Making matters worse, consumer goods data from SPINS and IRI showed that credit card spending growth with e.l.f. for the four weeks ending Aug. 11 slowed to 18%, pointing to the potential for a continued slowdown.
Can e.l.f. Beauty grow into its valuation?
Thanks to its share price rising more than fivefold over the last three years as the company's sales tripled, e.l.f. Beauty commands a valuation of 72 times earnings. This premium valuation means that the market is baking serious growth into its expectations for e.l.f., which is why it reacted so negatively to the recent credit card data.
To put this price-to-earnings (P/E) ratio in perspective, e.l.f. Beauty would need to deliver 21% earnings growth for five years to equal the S&P 500's average P/E ratio of 27.
However, e.l.f. Beauty may be deserving of this projected growth.
A recent Piper Sandler survey showed that 38% of teens think e.l.f. Beauty is the top cosmetic brand, indicating that the company could have decades of growth ahead. For added context, the next four most popular brands combined account for only 24% of the vote, highlighting e.l.f.'s dominance.
Should e.l.f. Beauty defend this leadership position among young consumers -- as Piper Sandler believes after reiterating its buy rating -- its shares could bounce back higher, but investors should remain braced for further volatility.
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Josh Kohn-Lindquist 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.
