This Beauty Stock Has More Than 80% Upside, According to Wall Street Analysts
Few cosmetic companies are taking market share at the pace that e.l.f. Beauty (NYSE: ELF) is. But the stock has, counterintuitively, dropped about 50% in recent months. And Wall Street seems to believe that the pullback is overdone.
TipRanks tracks many prominent analysts on Wall Street and averages out their price targets -- the prices per share that they think a stock will hit within the next year or so. For e.l.f. Beauty stock, the average price target is about $200 per share, or about 80% above where it trades as of this writing.
Here's why e.l.f. Beauty stock is down and why analysts believe it could go up -- and an important caveat for investors to know.
Why e.l.f. is down
Investors recognize e.l.f. Beauty as a high-growth business with great profit margins. But the stock has dropped in recent months because both of these attractive attributes are under scrutiny.
For starters, e.l.f. Beauty grew its net sales by 77% in its fiscal 2024 (which ended in March). Relatively little of this growth was thanks to its acquisition of Naturium -- most was organic growth, which is what investors want to see. But for fiscal 2025, management expects a much more modest growth rate of about 21%.
Furthermore, profits are taking a step back for e.l.f. In its fiscal 2024, the company's net income more than doubled from fiscal 2023 to $128 million. But in its fiscal first quarter of 2025, net income dropped about 10% year over year, partly because of investments in marketing.
The slowing growth rate and the drop in profitability have investors worried about e.l.f. Beauty stock.
Why analysts believe it could go up
As mentioned earlier, many analysts on Wall Street are resolutely bullish regarding e.l.f. Beauty stock. They still see upside, even though its growth is slowing and profits are pulling back.
Investors should remember that a growth rate over 20% is still fantastic, even if it's significantly slower than before. Moreover, analysts believe that e.l.f. Beauty has a strong chance of living up to, or even exceeding, these expectations. After all, management raised its guidance for net sales after reporting Q1 financials, which implies that the business is ahead of its original projections.
Additionally, e.l.f.'s profitability is declining only because of a sharp increase in marketing expenses. But this is a calculated move, and it won't necessarily continue for the long term. And it may be money well spent, considering e.l.f.'s brand awareness is still lower than those of the legacy players in the cosmetics space. And even with this spending, the business is still profitable.
Finally, e.l.f. Beauty generates only 16% of its sales from international markets, whereas its big competitors get 70% or more of their business overseas. This is an immediate opportunity and another good use of marketing dollars. Moreover, it's reason to believe that there could be long-term upside with the stock -- the business has plenty of runway as it looks to untapped markets.
An important caveat to keep in mind
For investors rubbing their hands together in anticipation of 80% gains for e.l.f. Beauty stock, here are some important things to remember what it comes to price targets from Wall Street.
First, the analyst community isn't the final authority when it comes to where a stock will trade within the next year or so. Like retail investors, the analysts are looking over e.l.f.'s business, the economy, and stock market conditions to come up with their best guess for the future stock price. It's an informed guess, to be sure -- but still a guess.
Second, analysts frequently change their price targets based on what stock prices are doing in real life. In the case of e.l.f. Beauty stock, many price targets out there haven't been updated recently. Since the stock has dropped in recent months, it wouldn't be surprising if the analysts started lowering price targets well below those that imply 80% potential upside.
This doesn't mean that investors should avoid e.l.f. Beauty stock. To the contrary, there's plenty about this business to like, and there's good reason to like it for the long term. However, those who put too much confidence in the commentary and price targets of the analysts could be disappointed.
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Jon Quast 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.
This Beauty Stock Has More Than 80% Upside, According to Wall Street Analysts was originally published by The Motley Fool