1 Growth Stock Down 50% to Buy Right Now

Shares of e.l.f. Beauty (NYSE: ELF) have been on a roller-coaster ride in 2024, soaring early in the year only to lose half their value from the highs reached earlier this year. The stock is currently down more than 25% on the year.

However, the company remains one of the strongest growth stocks in the consumer staples space, seeing its revenue soar 50% last quarter. Let's look at why now is a great time to buy this growth stock while it is down.

Market share gains

Simply stated, e.l.f. has taken the mass-market cosmetic industry by storm. Following a page from the apparel industry, the company uses a fast-follower approach, introducing similar offerings of popular prestige cosmetic products at a fraction of the price.

A huge part of the company's success stems from its marketing. In its early days, the company embraced social media and influencers, making sites like TikTok and Meta Platforms' Instagram its core marketing channels. Instead of embracing only influencers with huge followings, however, the company also worked with numerous micro-influencers to try to create a larger community.

More recently, the company layered on more traditional advertising, such as Super Bowl ads, celebrity endorsements, and brand collaborations. However, it's still at the leading edge when it comes to new marketing channels, being one of the first companies to test real-world commerce within the popular virtual world and gaming platform Roblox.

The e.l.f. brand has gained market share for 22 straight quarters and is now the No. 2 color cosmetics brand in the U.S., with a 12.3% market share last quarter. It has done so not only through product innovation and marketing but also by gaining shelf space at stores such as Target and Walmart. It is now the No. 1 cosmetic brand at Target, with a 21.4% market share last quarter.

Growth opportunities

While e.l.f. has had success gaining share in the color cosmetic category in the U.S., the company still has two major opportunities: skincare and international expansion. Currently, e.l.f. is taking its playbook from the cosmetics category and applying it to the adjacent skincare category. It saw 45% growth in the category in Q2 and gained 60 basis points of market share in the quarter.

However, it is still only the No. 9 player in the mass-market skincare space, with about a 2% market share. The leading company in the category has a 14% share. That means e.l.f. has a lot of room to grow its skincare presence, and last year, the company acquired the Naturium brand to boost its skincare efforts.

Naturium has slightly higher price points than e.l.f and is considered a compliment to its e.l.f. skin brand. The brand has primarily been sold through Target and Amazon, and the company is looking to use its distribution power to extend its reach. It recently just got the brand into Ulta Beauty.

International expansion is another big opportunity for e.l.f. The company saw its international revenue growth soar by 91% last quarter, but it is still only in a few countries. However, it has already gained a strong following, including becoming the No. 1 mass-market cosmetic brand in Italy and the Netherlands and the No. 4 brand in the U.K. and Canada.

However, e.l.f.'s international penetration is currently 16% compared to more than 70% for many of its peers. As such, this represents another large avenue of growth for the company.

Image source: Getty Images.

A victim of its own success

In many ways, the decline in e.l.f's share price from its highs results from its recent past success. Last year, e.l.f. provided initial guidance for revenue growth of between 22% and 24%, but it came in at a whopping 77%. This year, the company initially forecast revenue growth of 20% to 22% and then bumped that up to 25% to 27% revenue growth after its fiscal Q1 report.

In both instances, investors were disappointed, expecting similar results to last year. For fiscal Q1 2024, e.l.f. increased the top end of its guidance from $720 million to $802 million, a jump of $82 million, or over 11%, while it raised it by a more modest $50 million, or 4%, for fiscal Q1 2025.

However, the sell-off in e.l.f.'s stock has left it at an attractive valuation, given the skincare and international growth opportunities that still lie ahead. The stock currently trades at a forward price-to-earnings ratio (P/E) of 25 times fiscal year 2026 analyst estimates (ending March) and a price/earnings-to-growth ratio (PEG ratio) of only 0.5 times. A PEG under 1 times is usually considered undervalued, while growth stocks will often command multiples much higher than 1.

ELF PE Ratio (Forward 1y) data by YCharts. PE Ratio = price-to-earnings ratio. PEG Ratio = price/earnings-to-growth ratio.

E.l.f. is a growth stock whose recent sell-off has put it in the bargain bin. This is a company that is still growing strongly and has solid opportunities ahead of it. As such, I'd be a buyer of the stock at current levels.

Should you invest $1,000 in e.l.f. Beauty right now?

Before you buy stock in e.l.f. Beauty, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and e.l.f. Beauty wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $765,523!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 30, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Meta Platforms, Roblox, Target, Ulta Beauty, Walmart, and e.l.f. Beauty. The Motley Fool has a disclosure policy.