e.l.f. Beauty on a Shelf: Consolidating for the Next Leg Up?

The chart on cosmetics company e.l.f. Beauty, Inc. NYSE: ELF can be described in one word — gorgeous.

The surging mid-cap is riding an eight-month winning streak that, absent a -1% September 2022 blip, would be at 13 months. Although it has more than quadrupled along the way, the momentum play is only getting stronger. The 25.1 million shares traded in May 2023 marked the highest monthly volume of the market-crushing streak.

Led by resilient demand for clean skincare and makeup brands, ELF delivered stunning fiscal fourth-quarter numbers, including 78% revenue growth and 223% profit growth. This caused the stock to gap up to a fresh record high on May 25th, in the 15 trading days since ELF has gone sideways. The narrow range has created a shelf-like platform that technical analysts call a 'consolidation' pattern.

When a stock consolidates, it bounces within an unusually tight trading band. In ELF's case, approximately $8.00 separates the high and low end of the range over the last few weeks. Think of it as a tightly contested tug-of-war between bulls and bears. 

Why is consolidation important? Like all technical patterns, a consolidation is meant to be broken at some point. And like a coiled spring, it is often the springboard for the stock's next major directional move.  

For an ultra-hot stock like ELF that's up more than 1,200% from its pandemic low, it may seem that the next move should be down. But given a strong growth outlook, this consolidation could be the foundation for yet another 'face-lift.'

What Are e.l.f. Beauty's Growth Drivers?

Piper Sandler's latest "Taking Stock with Teens" survey revealed that ELF is U.S. teens' number one cosmetic brand. Aside from product quality and affordable pricing, the company's support of popular environmental and ethical issues like cruelty-free testing, sustainable packaging and mental health are making it easy for younger consumers to get behind ELF. While it also caters to older American shoppers, a strong connection with a massive set of future spenders is ELF's biggest long-term growth driver.

In addition to its namesake skin, eye, lip and face care, ELF sells the Alicia Keys-inspired Keys Soulcare beauty products and the Well People line of plant-based cosmetics. Together, these items have produced 17 consecutive quarters of sales growth and made ELF the world's third-largest mass cosmetics line behind Maybelline and L'Oreal. As brand awareness grows, ELF is gaining critical shelf space at national retailers like Ulta Beauty.

A big reason for ELF's success is its strong online presence. Effective social media campaigns and powerful word-of-mouth marketing were behind 75% digital sales growth in fiscal 2023. In Q1, enrollment in the Beauty Squad Loyalty program increased 25% year-over-year to 3.7 million members. 

These catalysts are expected to drive another strong performance in ELF's new fiscal year. At the midpoint, management forecasts 23% top-line growth and adjusted earnings per share (EPS) of $1.75. Considering how handily guidance has been topped over the last two years, this outlook may again prove conservative.

Is e.l.f. Beauty Stock Overvalued?

ELF is trading at 59x this year's earnings estimate. This is significantly above the personal care and product industry's five-year average P/E of 45x but may be a premium well-deserved. Estee Lauder is trading at 60x but, largely due to China's weakness, is experiencing sharp profit declines. 

Wall Street thinks it is a premium worth paying for. Since ELF's latest quarterly report, seven analysts have called the stock a buy compared to two holds and no sells. Last week, Morgan Stanley raised its price target to $118, which implies a 13% upside from Friday's close. 

Hedge funds, on the other hand, are getting more cautious about the cosmetics disruptor. As ELF ascended to new highs in the first quarter of 2023, a handful of hedge funds exited or trimmed their positions.

Company insiders have also been taking some profits off the table. In the last three months, ELF insiders sold a net $16 million of the stock, with most of the trading activity coming from CEO Amin Tarang.

A string of huge quarterly beats and a strengthened market position have set the bar high for ELF. Fiscal Q1 results on August 1st may determine if it climbs to a higher shelf.