Where Will e.l.f. Beauty Stock Be in 3 Years?

e.i.f. Beauty (NYSE: ELF) has evolved into one of the world's fastest-growing cosmetics companies in the two decades since its founding. The American underdog, which went public eight years ago, carved out a niche by targeting younger shoppers with affordable products, online sales, and savvy social media campaigns. It also sold its products at more brick-and-mortar retailers, acquired smaller companies, and expanded internationally.

If you had invested $1,000 in e.l.f. Beauty's initial public offering (IPO), your investment would be worth nearly $7,300 today. However, its stock has pulled back more than 30% over the past six months as investors fretted over its cautious near-term outlook. Let's see where its stock might be headed over the next three years.

Image source: Getty Images.

What happened over the past three years?

It's easy to see why e.l.f. Beauty impressed the bulls. From fiscal 2021 to fiscal 2024 (which ended this March), its revenue grew at a compound annual growth rate (CAGR) of 48%; its gross margin expanded from 65% to 71%; and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose at a CAGR of 57%. On a generally accepted accounting principles (GAAP) basis, its net profit grew at a CAGR of 174%.

Data source: e.l.f. Beauty.

That rapid expansion was driven by its robust organic growth, its use of high-quality marketing campaigns to promote its low-cost products (most of its items cost less than $20), and its sales at resilient superstore retailers like Target (NYSE: TGT) and Walmart (NYSE: WMT). It also acquired Naturium (which is a more popular brand among millennial women and men) to expand its reach beyond its core market of Gen Z women.

By comparison, L'Oreal's (OTC: LRLCY) revenue only grew at a CAGR of 14% from 2020 to 2023. Estée Lauder's (NYSE: EL) revenue actually declined at a negative CAGR of 1% from fiscal 2021 to fiscal 2024 (which ended this July). Both of those cosmetics heavyweights are heavily dependent on the fickle Chinese market, where consumer spending has been throttled by persistent macroheadwinds.

Yet e.l.f. Beauty doesn't sell many of its products in China. It still generates most of its revenue in the U.S., and its international business (16% of its revenue in its latest quarter) primarily sells its products in Canada, the U.K., the Netherlands, and Italy. Instead, e.l.f. Beauty produces "substantially all" of its products in China -- which keeps its costs low and gross margins high -- but sells them in other countries.

From fiscal 2021 to fiscal 2024, e.l.f. Beauty's international revenue rose at a CAGR of 66% as its domestic revenue increased at a CAGR of 45%. It plans to maintain that overseas momentum by expanding into more markets like France, Australia, and Saudi Arabia.

What could happen over the next three years?

For fiscal 2025, e.l.f. Beauty only expects its revenue to rise 25% to 27% as its adjusted EBITDA grows 27% to 28%. That outlook is healthy, but it would still represent a significant slowdown from the past two years.

To the bears, that deceleration implies e.l.f. Beauty's business is maturing. As it saturates its niche, it needs to rely more on big acquisitions like Naturium to drive its future-sales growth. However, the bulls believe e.l.f. Beauty still has plenty of room to grow as it expands overseas, sells its products at more retailers, and makes smart investments and acquisitions. It could also be a tempting takeover target for a bigger cosmetics company like L'Oreal or Estée Lauder.

From fiscal 2024 to fiscal 2027, analysts expect e.l.f. Beauty's revenue to grow at a CAGR of 21%; its adjusted EBITDA to increase at a CAGR of 23%; and its GAAP earnings per share (EPS) to rise at a CAGR of 40%. With an enterprise value of $6.2 billion, e.l.f. Beauty's stock still looks reasonably valued at four times next year's sales, 16 times its adjusted EBITDA, and 30 times its forward earnings. Assuming it matches analysts' expectations, grows its adjusted EBITDA by another 25% in fiscal 2028, and still trades at the same forward valuations, e.l.f. Beauty's stock could rally more than 40% and boost its enterprise value to $8.8 billion by calendar 2027.

That wouldn't be as impressive as its 240% rally over the past three years, but e.l.f. Beauty could still outperform its bigger industry peers and the S&P 500 -- which has generated an average-annual return of about 10% since its inception -- as it tosses more irons in the fire.

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Leo Sun has positions in L'Oréal. The Motley Fool has positions in and recommends Target, Walmart, and e.l.f. Beauty. The Motley Fool has a disclosure policy.