Prediction: E.l.f. Beauty Will Be One of My Best Investments This Year. Here's Why.

Key Points

• E.l.f. Beauty shares have rebounded off their lows nicely this year.

• The company's acquisition of Rhode looks like a game changer.

• The stock is still attractively valued, even after its recent run.

• 10 stocks we like better than e.l.f. Beauty ›

One of my best investments this year will undoubtedly be e.l.f. Beauty (NYSE: ELF). A big reason for this is that I was buying the stock this year on its dip into the $60s.

At the time, investors were panicking after the company issued weak fiscal Q4 sales guidance. The cosmetics industry as a whole was feeling some pressure, while uncertainty over TikTok, where the company has a huge marketing presence, caused some headwinds.

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However, the slowdown didn't take away from the fact that e.l.f. has taken massive market share in the mass cosmetics category over the past several years. Its products and marketing have resonated with younger consumers, while it's gained massive shelf space at retailers.

While the impact of tariffs continued to weigh on the stock, the company was able to proactively change its fortunes when it agreed to acquire high-end beauty upstart Rhode in a $1 billion deal. The stock has more than doubled from my buys earlier this year, but the best may yet to come.

Image source: Getty Images.

The Rhode to redemption

E.l.f.'s acquisition of Rhode, which closed in August, is a huge game changer for the company. Backed by celebrity Hailey Bieber, the brand was able to generate sales of $212 million in less than three years since its launch. While that is impressive on its own, what's even more impressive is that was done by only selling a handful of products on its website with little paid marketing.

While e.l.f. has made its mark in the mass cosmetics space, Rhode gives it an upscale skincare and beauty brand with higher price points and better gross margins. Importantly, Bieber will stay on as chief creative officer and head of innovation and remain the face of the brand.

The beauty of the acquisition for e.l.f. is how nascent the Rhode brand is. It only sold about 10 products, so there is a big opportunity to expand its product line. In addition, one of e.l.f.'s biggest strengths has been its influencer marketing machine, which it will plug the Rhode brand right into.

However, the biggest growth driver for consumer products is distribution gains. If you want to find a consumer stock with a lot of upside potential, look for one that is getting into more stores and gaining shelf space. E.l.f. has been doing that over the past several years with its namesake brand, but now it gets to do the same thing with Rhode.

Even before the acquisition, Rhode was set to enter Sephora stores this fall, and it successfully launched its products at all Sephora stores and online in the U.S. and Canada earlier this month. It will enter U.K. Sephora stores later this fall. Sephora has more than 3,200 stores around the world, so this is a big opportunity for the brand moving forward. It's also worth noting that Sephora will be carrying 16 Rhode products at launch, so it's already started to expand its product lineup.

Sephora is also likely just the start. Ulta Beauty is the next logical retail partner for the Rhode brand, given that e.l.f. already has a solid relationship with the company, which sells both prestige and mass market cosmetics and skincare products. Target is another potential option down the road, as e.l.f. has gained a lot of shelf space at the retailer and it still gives a more upscale vibe than other mass market retailers.

Is the stock still a buy?

I firmly believe that one of the best trades an investor can make is buying a consumer stock ahead of distribution gains. It doesn't matter if the product is dog food, energy drinks, or beauty products. Increased distribution generally leads to outsized revenue growth, which the market then rewards. E.l.f. used this playbook once, and now it can now run it back with Rhode.

Meanwhile, the stock still has a relatively attractive valuation given the growth in front of it. While it currently trades at a forward price-to-earnings (P/E) ratio of 42 (based on analysts' estimates for fiscal 2026), its price/earnings-to-growth (PEG) ratio is only 0.5. A stock with a positive PEG ratio of less than 1 is typically viewed as undervalued.

Between its distribution opportunity and valuation, this growth stock looks like it has plenty of upside ahead.

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Geoffrey Seiler has positions in e.l.f. Beauty. The Motley Fool has positions in and recommends Target, Ulta Beauty, and e.l.f. Beauty. The Motley Fool has a disclosure policy.