e.l.f. Beauty Stock Just Got Hammered. Is This a Buying Opportunity?

Shares of e.l.f. Beauty (NYSE: ELF) were slammed after the company's latest quarterly update, losing more than a third of their value. The pullback was driven by management's disappointing full-year outlook -- especially as it relates to its profit guidance.

The beauty company, known for value-priced cosmetics and a growing skin-care lineup, also closed its first quarter integrating Rhode -- Hailey Bieber's brand -- into its portfolio, which added a new growth lever but didn't quiet investor concerns about near-term profitability.

With the stock down about 40% year to date, it's a good time to take a look at the stock.

Image source: Getty Images.

Still a growth story

Despite the stock's ugly performance recently, e.l.f. is still a growth story. Net sales for its fiscal second quarter (the three-month period ended Sept. 30) increased 14% to $343.9 million, marking the company's 27th straight quarter of growth.

Additionally, management highlighted market share gains for the core e.l.f. brand during the quarter and called out a "record-breaking launch of Rhode in Sephora North America."

But profits were challenged as operating expenses also moved higher and gross margin contracted. Adjusted sales, general, and administrative expenses (SG&A) rose to 56% of sales as the company leaned into spending aimed at boosting brand awareness. In addition, e.l.f.'s gross margin dipped by about 165 basis points to 69%, with the company citing higher tariff costs as the main headwind. All of this led to adjusted diluted earnings per share landing at $0.68, down from $0.77 in the year-ago period.

A tariff problem

Where things really get murky is guidance.

First of all, management said it expects full-year fiscal 2026 net sales between $1.55 billion and $1.57 billion. While this translates to about 18% to 19% growth versus last year, the guidance range was below analysts' consensus forecast for the key metric. Even worse was a forecast for fiscal 2026 adjusted earnings per share of $2.80 to $2.85 -- significantly below last year's $3.39. On a similar note, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) are projected at $302 million to $306 million, only slightly above fiscal 2025's $297 million.

With about 75% of its global production sourced in China, tariffs are the primary culprit for e.l.f.'s disappointing profit outlook.

So, is the stock attractive after its big drawdown? Unfortunately, I don't think so. Shares currently trade at a price-to-earnings ratio in the mid-forties -- and tariffs may weigh on earnings going forward. In addition, the script has flipped; the company's China-dependent supply chain has gone from an advantage to a disadvantage.

Sure, e.l.f.'s growth is impressive. But the company's shares still command a premium valuation multiple on par with growth stocks boasting durable competitive advantages. And these latest results show that e.l.f.'s competitive advantage may not be as durable as investors thought. If the company can't keep its production costs in check, it could lose its edge as the low-cost leader in the space. Further, even if tariffs are revoked at some point, there's always the risk that another tariff war will ensue in the future.

Ultimately, the impact of tariffs on e.l.f.'s business has exposed a weakness that investors may not be able to unsee. To address the situation, e.l.f. will need to diversify its supply chain -- and that could negatively impact its value proposition with customers.

For now, I'd avoid e.l.f. shares. Despite the big decline in the stock price, shares look overvalued given the company's heavy dependence on China production. If the sell-off worsens, I might reconsider my stance. For now, however, I don't believe the stock price fully bakes in the challenges the company is facing.

Daniel Sparks and his clients have 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.