For decades, the beauty sector seemed unflappable. Companies expanded to international markets where people had increasing amounts of disposable income to spend on fragrance, skincare, and makeup products. Global population growth -- especially in Asia -- was another major tailwind. This is how leading beauty conglomerate Estée Lauder (NYSE: EL) grew to a market cap of over $100 billion a few years ago.

Today, most of this value has been lost. How? Those prior tailwinds have turned into headwinds, especially in the Chinese market. Here's why Estée Lauder's stock has plunged 82% from its all-time high, and how investors should look at the stock going forward.

Start Your Mornings Smarter! Wake up with Breakfast news in your inbox every market day. Sign Up For Free »

Chinese consumer recession

It's no secret why beauty companies like Estée Lauder poured resources into China. The country has a population of over 1 billion people with a huge beauty culture, and growth in this market propelled revenue in Estée Lauder's Asia Pacific segment to nearly $5.5 billion in 2021. It owns well-known brands such as Clinique, Aveda, and Bobbi Brown.

However, 2021 was also the year China's real estate bubble collapsed with an estimated $18 trillion of wealth wiped off Chinese consumers' balance sheets, according to banking analysts. Consumer spending in China has been woefully anemic for years now, which has greatly affected Estée Lauder's operations.

In the company's fiscal 2025 first quarter (ended Sept. 30), Asia Pacific revenue declined 11% year over year to $944 million. This was on top of a 6% decline in fiscal 2024 and a 4% decline in 2023. Investors see no signs of a recovery in China with management saying last quarter that consumer sentiment there continues to weaken. It doesn't help that China's population has started to decline and is projected to continue doing so for the next few decades.

Big stock drawdown, declining profit margins

In the last 12 months alone, Estée Lauder stock is down over 40%, even though the S&P 500 has soared over the same period. The company's trailing-12-month revenue has fallen to $15.4 billion, which is right around its pre-pandemic level. However, the stock is much lower than where it traded in 2019 and early 2020.

Estée Lauder has also struggled to manage rising costs for its business. The company's operating margin has fallen to 10% in the last 12 months, compared to its historic range of 15% to 20%. This has dragged its trailing operating income close to a 10-year low. At the end of the day, investors care about profits, which is why Estée Lauder stock is struggling so much.

Should you buy the dip?

Making any projection about the future of this stock requires an analysis of its future earnings potential. On the one hand, cost pressures have affected margins, and it is suffering in the Asia Pacific market. It is hard to predict if or when this pain will end.

On the other hand, the company does not solely sell products in China. It also has large markets in the Americas, Europe, and the Middle East that made up over 70% of its sales last quarter. These regions will (hopefully) offer the business some stability.

With that in mind, expectations for Estée Lauder stock are low, too. The stock's market cap is $23 billion, or about 14 times its trailing operating income of $1.6 billion, and the challenges the company faces around profitability and weak demand in China are already priced into its shares. For long-term investors who believe in the lasting power of Estée Lauder's brands, this could be the right time to buy the stock.

Should you invest $1,000 in Estée Lauder Companies right now?

Before you buy stock in Estée Lauder Companies, 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 Estée Lauder Companies 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 $904,692!*

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 November 4, 2024

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

1 of the Biggest Reasons Behind Estée Lauder Stock's Plunge was originally published by The Motley Fool