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Generally, a strong earnings performance yields a robust move in the market and that was exactly the case for beauty care products specialist e.l.f. Beauty (ELF). Primarily offering face and eye makeup along with lip and nail products, e.l.f. enjoyed record net sales growth. Even better, circumstances might favor continued business expansion, casting ELF stock in a very favorable light.
For the company’s fiscal fourth quarter (three months ending March 2024), e.l.f. reported 71% revenue growth to $321 million, per Barchart content partner The Motley Fool. The publication noted that “[t]his was its fifth straight quarter of revenue growth above 70%. The brand is gaining tons of market share in the beauty category around the globe with its disruptive low-price but high-quality offerings.”
Catapulting this enormous growth, argues TMF, is innovative marketing. “Through various channels like TikTok and even a Super Bowl commercial, Elf Beauty has become one of the best brand marketers in the world. It has upped its marketing as a % of revenue to 25% compared to under 10% a few years ago. This has greatly grown its brand awareness and driven this revenue-growth acceleration.”
What’s also key to the enormous rise of ELF stock is that the underlying enterprise is profitable. Over the last 12 months, the company generated $127 million in net income. Additionally, management is reinvesting a considerable portion of the windfall for growth. It’s doing the double, sparking bonkers sales growth while still padding the bottom line.
Not surprisingly, activity in the derivatives market shot up for ELF stock last Friday before the long weekend.
Unusual Options Activity Spikes for ELF Stock
Following the ringing of the closing bell for the May 24 session, ELF stock ranked among the highlights in Barchart’s screener for unusual stock options volume. This data interface allows retail investors to better understand what the smart money may be targeting.
For ELF stock options, total volume hit 34,995 contracts against an open interest reading of 111,500. Further, Friday’s volume represented a 187.34% magnitude difference against the metric’s trailing-one-month average. Call volume came out to 20,141 contracts versus put volume of 14,854 contracts, yielding a put/call volume ratio of 0.74.
Turning to options flow – which focuses exclusively on big block trades likely made by institutions – derivatives with bullish sentiment roughly matched up evenly in terms of transaction count with options featuring bearish sentiment. However, it’s noteworthy that for the latter category, the biggest premium stood at $58,500. Conversely, for the former category, the biggest premium was $50,400.
It’s possible that some traders are hesitant on ELF stock continuing to swing higher. Last week, it gained almost 22% of equity value. For the year, it’s up slightly over 37%. As with any hot security, it wouldn’t be shocking to see some profit-taking activities. However, such events would likely represent a healthy correction against a positive longer-term outlook.
Sure, ELF stock carries a hefty premium to revenue with a 10.8X multiple. The broad household and personal products segment prints a sales multiple of 1.74X. Still, that’s not exactly a great way to assess e.l.f. because frankly, most such products are boring. In contrast, e.l.f. – as mentioned earlier – resonates with its audience thanks in large part to its marketing initiatives.
Further, it should be mentioned that analysts see revenue hitting $1.28 billion at the end of the current fiscal year. Given the outstanding performance of the company in the last year, this target should be a reasonable one. Assuming a shares outstanding count of $55.94 million, ELF stock is presently trading at 8.37X projected sales.
It’s hot, yet, but it has room to grow into its valuation, considering that the average sales multiple in fiscal 2024 has been 10.49X.
Strong Fundamentals Support the Case for e.l.f. Beauty
Another factor that supports the bullish thesis for ELF stock is the fundamentals. In particular, social normalization trends are moving in the right direction. That means more people are going out and about in public, which naturally bodes well for the cosmetics industry.
A specific catalyst is the rising demand for vacations. True, the revenge travel phenomenon that dominated consumer sentiment when COVID-19-related restrictions were first removed may no longer be acute. However, in its place is the concept of travel prioritization. Even with a rough economy, people – especially those from the younger demographic – are prioritizing experiential expenditures.
Plus, in an opportunistic sense, the dollar is strong relative to many other international currencies. Such dynamics will likely incentivize foreign travel. Of course, people generally prefer to look presentable when out in public. This factor combined with e.l.f.’s successful marketing to young consumers should spell sustained upside.
ELF stock probably won’t get your rich at this point. Nevertheless, this opportunity still has legs.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
