e.l.f. Beauty Shares Are Down 10% This Month. 2 Reasons the Stock Is Sinking.

e.l.f. Beauty (NYSE: ELF) has become one of the top names in cosmetics and skincare, displacing some of the traditional leaders that have been around for decades.

But despite its dramatic rise, its stock has been sinking for a while, and it's down 10% over the past month alone. Here are two reasons why the market is pessimistic today, and what investors should do.

Image source: Getty Images.

1. E.l.f.'s margins are pressured

e.l.f.'s revenue has skyrocketed over the past few years, increasing at a compound annual growth rate (CAGR) of 23% over the past decade. It has gained more than a full percentage point of market share on average each year over that time as well, skyrocketing past the legacy brands.

Its unit volume CAGR over the past five years is 16%, while its major competitors have either remained flat or declined, and management expects these trends to continue. Sales increased 38% year over year in the fiscal 2026 third quarter (ended Dec. 31), and management is guiding for full-year sales to increase 22% to 23%.

However, costs have been rising, too, and the cosmetics company is investing to deepen engagement and penetration. The market wasn't thrilled with e.l.f. after President Donald Trump raised tariffs last year, since e.l.f. is highly reliant on overseas production. Although the stock has bounced back and forth since then, the tariffs have had a negative impact on margins. Gross margin dropped 1.2% percentage points in the third quarter from the prior year, and while net income increased, it's still down for the past nine months.

2. Disposable income might be shrinking

There's been macroeconomic volatility for a while now, and the market has been cautious about many consumer discretionary stocks due to worries about shrinking disposable income. While many signals have started to look more positive, the Iran war and soaring oil prices are putting a dent in that thesis.

On one hand, e.l.f. prides itself on its cheap prices, which it often contrasts with premium brands. If consumers cut their spending, they may switch to cheaper brands like e.l.f. On the other hand, when there's inflation and general economic instability, it impacts the mass consumer much faster than the affluent consumer.

Given these considerations, is e.l.f's price drop a value trap or a buying opportunity? I think investors should look past the near-term worries and recognize the company's strong brand and consumer loyalty. e.l.f. continues to grab market share and generate higher sales, and it has a long growth runway.

The stock is trading at a high discount to averages, but it's still objectively pricey, trading at a P/E (price-to-earnings) ratio of 41. That implies that despite the price drop, the market still sees the opportunity.

This is probably not the candidate for the most risk-averse investor, but it looks like a great opportunity if you have a long time horizon and can handle some risk.

Jennifer Saibil 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.