1 Growth Stock Down 40% to Buy Right Now

Last year was a roller coaster ride for e.l.f. Beauty (NYSE: ELF), but also a transformational one. The company continued to take market share, but it did see its swift revenue growth stall after running into some industry headwinds and tariff pressures.

E.l.f. also acquired the prestige skincare brand Rhode, which helps set it up for its next leg of growth.

The growth stock is now down about 40% from its highs, but its long-term outlook remains strong. Let's see why the stock looks like a good buy on this dip.

Image source: Getty Images.

Taking market share

E.l.f. has taken the mass cosmetics industry (with its widely available and affordable brands) by storm over the past several years, winning huge market share away from incumbents and gaining shelf space. It's done this primarily by using a fast-follower strategy and influencer marketing.

Taking a page out of the fashion industry, and popularized by clothing brands like Zara, e.l.f. would make copies of hot-selling prestige brands and sell them at a fraction of the price. Its product quality is generally considered good, although not to the same level as the originals.

At the same time, management targeted a younger demographic and pushed hard to attract Hispanic consumers. It leaned heavily into influencer marketing and has been one of the top companies to find success with social media campaigns, particularly on TikTok.

Much of the e.l.f. brand's growth has been fueled by increased distribution and shelf space. It has done particularly well at Target, and has a strong presence in other outlets like Ulta Beauty. E.l.f. has recently expanded into Dollar General, and management thinks it still has a lot of shelf space to gain at Walmart. E.l.f. has done well in international markets, but it's still in its very early stage of international expansion and getting into more stores.

E.l.f.'s 2% to 5% organic growth outlook for the second half of its fiscal year also doesn't capture the full picture because it is facing inventory stocking headwinds. The company has said that U.S. consumption growth is running closer to 12% for the e.l.f. brand, and globally it's at about 8% as it cycles through some big European launches. Notably, the company also has a history of conservative guidance.

The Rhode to recovery

The biggest growth opportunity for e.l.f., though, is with its recent acquisition of premium skincare brand Rhode. It was founded by the model and TV personality Hailey Bieber and quickly grew to more than $200 million in sales in less than three years with little paid marketing, while selling just a handful of items on its website. E.l.f. will have a number of ways to drive sales of the Rhode brand in the coming years.

The first is through increased distribution, and the company was already scheduled to launch in LVMH's Sephora stores before the Rhode acquisition. All indications were that the debut was a huge success, with the company selling an estimated $10 million in products during the first two days in the U.S. and Canada.

E.l.f. will now start introducing the brand to other Sephora locations around the globe. And after an initial exclusivity period, e.l.f. is likely to bring the Rhode brand to other outlets where it has strong relationships.

Next, the company will likely expand Rhode's small product assortment and increase marketing to drive brand awareness, which should be a growth driver.

Time to buy the stock

With e.l.f. about 40% off its highs, the stock now trades at an attractive valuation, with a forward price-to-earnings ratio (P/E) of 26.5 based on fiscal 2027 analyst estimates and a price/earnings-to-growth ratio (PEG) below 0.5. Stocks with positive PEG ratios under 1 are generally considered undervalued. Given its growth opportunities, especially with Rhode, now is a great time to buy the stock.

Geoffrey Seiler has positions in LVMH Moët Hennessy-Louis Vuitton and e.l.f. Beauty. The Motley Fool has positions in and recommends Target, Ulta Beauty, Walmart, and e.l.f. Beauty. The Motley Fool has a disclosure policy.