Why e.l.f. Beauty Stock Was Falling Today

Shares of e.l.f. Beauty (NYSE: ELF) were pulling back today after short-seller Muddy Waters announced a short position in the cosmetics stock, accusing it of overstating revenue, profits, and inventory.

Not surprisingly, investors didn't take the news well, and the stock was down 9.9% at 2:15 p.m. ET.

Image source: Getty Images.

E.l.f. finds itself in the crosshairs

Muddy Waters, which has been an active short-seller for more than a decade, said that e.l.f. had been materially overstating its revenue over the last three quarters by an estimated $135 million-$190 million.

The short-seller said that the beauty company realized that its growth narrative was in trouble in its second quarter and believed inventory also appeared to be inflated. Muddy Waters also noted that e.l.f. announced a change in its sourcing practices that led to the "sudden appearance" of $36.9 million in inventory, which e.l.f. said was because it took ownership of merchandise in China.

Muddy Waters' investigation found that e.l.f. had historically taken ownership of goods in China, so it believes the move was designed to inflate sales.

What it means for e.l.f.

Muddy Waters isn't the first short-seller to attack e.l.f. A year ago, Spruce Point Captial Management said it was shorting the stock due to concerns about its vendor relationships. The stock continued to surge after that report, however, though it's down sharply from its peak in June.

E.l.f. has not yet responded to Muddy Waters' report, but the sell-off of the stock indicates investors are taking it seriously. E.l.f. has also seen soaring growth in recent quarters, even though the industry has mostly struggled, though its products' low price points have helped the business gain momentum.

Muddy Waters' report received a lot of pushback from investors on X, but investors should look out for a response from the company. https://twitter.com/muddywatersre/status/1859273379145978200 Given its sudden burst of growth from the company, it's not surprising that short-sellers see an opportunity here.

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Jeremy Bowman 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.