e.l.f. Beauty on a shelf; a good time to buy

Key Points

• e.l.f. Beauty had a stunning quarter, outperforming by 1300 basis points on the top line. 
• Guidance was raised, but it may still be cautious, given the trends. 
• Analysts are raising their targets and leading the market higher. 

e.l.f. Beauty, Inc. NYSE: ELF is trending strongly higher and will likely continue in 2024. The company is in a hyper-growth phase that came out of nowhere and is gaining momentum. The stock price struggles with traction following the Q3 results and Q4 guidance, but the struggle will likely be short-lived because of the business momentum. Besides, a healthy correction in the stock price is needed after the 100% run-up posted over the past few months. A little profit-taking now will give the market time to digest the news and set up for the next rally. 

e.l.f. Beauty Q3 strength is not unexpected 

e.l.f. Beauty had a stunning quarter with revenue growth of 85%, outperforming consensus by 1330 basis points. That said, the strength is not unexpected because the analysts have been light in their forecasts all year. Among the many reasons for strength are the company's digital footprint and resonance with younger shoppers. The company has gained quarterly market share consistently for years and added another 305 basis points in Q3. Retail is also cited as an area of strength, gaining share from names like The Estee Lauder Companies NYSE: EL and other legacy cosmetics companies. 

The margin news is also favorable to higher share prices. The company widened its gross and operating margins to significantly improve the bottom line result. The margin improvement is due to FX tailwinds, lower transportation costs, mix and savings, with at least three of these factors expected to persist in FQ4 and the first half of 2024. The $0.75 in adjusted earnings is double last year's adjusted earnings

Guidance is mixed. The company raised its guidance for the full year but to a range with revenue below the consensus forecast and earnings bracketing it. The revenue is expected to grow by a slim $12 million sequentially, contrary to the trend and a significant growth slowing, suggesting caution from execs. 

Because cosmetics and personal care items were among the top sellers in 2023, strength is expected in 2024 from the industry, specifically, e.l.f., and odds for outperformance are high. The company outperformed consensus by an average of $28 million for the last four quarters. It may continue at this pace due to the rapid market share gain and customer penetration.

Analysts like the look of e.l.f. Beauty

Analysts like the look of e.l.f. Beauty and rate it a Moderate Buy. The consensus rating has been steady over the last year, but the price target is rising. The only negative is that the consensus target lags the market by 10% but still rises after the Q3 release. The first two revisions are from Bank of America and UBS Group, which maintained their Buy ratings and raised their price targets. They set targets at $202 and $200, the new high end of the analysts' range, and expect a 15% upside from the current price action. This is the 2nd price target from each so far in 2024. 

Institutions are also buying into the e.l.f. Beauty growth story. Institutions own more than 90% of the stock, and a lot of it is fund holdings, and their activity ramped higher in 2023.

The technical outlook: e.l.f. Beauty takes a breather

The price action in ELF stock peaked ahead of the Q3 results and showed downward pressure after. The caveat is that downward pressure is minimal, and support is evident. Support is above the 30-day EMA, which is significant. Assuming the market can sustain this level, the rally may continue soon. If not, consolidation could take the market down to the $155 region, where support should be solid. If not, this market could fall to $150 or lower, but this is not expected, with analysts raising their targets and setting new highs.