Best Stock to Buy Right Now: Ulta Beauty vs. e.l.f. Beauty

The stock market hasn't shown much love to specialty retailer Ulta Beauty (NASDAQ: ULTA) or cosmetics giant e.l.f. Beauty (NYSE: ELF) lately. Shares of these two industry giants are down 27% and 55%, respectively, in the past year, amid mixed financial trends.

The headline numbers are far from glamorous, but there are still several reasons for investors to take a second look. Often, a large sell-off can present an opportunity to pick up shares of a high-quality company at a discount ahead of a possible rebound. Let's discuss whether Ulta Beauty or e.l.f. Beauty is the better stock to buy right now.

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Image source: Getty Images.

The case for Ulta Beauty

Ulta Beauty is a convenient retail destination for cosmetics, fragrances, skincare, haircare products, and in-store salon services making its one-stop-shop concept widely popular. Despite nearly doubling its store network to 1,437 locations across the United States in the past decade, the last couple of years have more been challenging. Management has cited several headwinds, including the shifting economic environment and increased competition as pressuring results.

In the third quarter (ended Nov. 2), comparable-store sales increased by just 0.6% year over year, slowing from the 4.5% rate in the prior-year quarter. Through the first nine months of the year, earnings per share (EPS) decreased 5.9% from 2023 to $16.93, against softer margins.

While the trends have underperformed loftier expectations since the start of last year, the key takeaway is that the company remains profitable, with overall solid fundamentals. Notably, the company's latest update noted a robust holiday shopping season, guiding for positive comparable sales and a modestly higher operating margin ahead of its final fourth-quarter and fiscal 2024 results, to be released on March 13, 2025.

Investors who believe in Ulta Beauty's long-term growth potential have plenty of reasons to buy and hold the stock now.

The case for e.l.f. Beauty

At the other end of the industry supply chain, e.l.f. Beauty stands out as a disruptor in the cosmetics and skincare products market. For 20 years, e.l.f. has been highly successful in democratizing makeup by developing professional-grade products at affordable prices, capturing market share from pricier brands like Estée Lauder and L'Oreal.

The company has also innovated by leveraging online platforms and social media to build brand awareness over the past decade. The results have been impressive, including an ongoing record of 24 consecutive quarters with an average growth rate above 20%. In the last five years, e.l.f. Beauty stock has returned 275%.

Compared to Ulta Beauty, which saw its growth stall in 2024, e.l.f. has faced a slowdown, but from a very high level. In the company's fiscal 2025 third quarter (for the period ended Dec. 31), sales increased by 31%, in the context of an exceptional 85% growth rate in the same period last year. In this case, the company has struggled to manage its massive growth, evident in a compression of margins, while a revision to full-year guidance disappointed Wall Street expectations.

The company is now targeting full-year 2025 revenue growth of 27% to 28% and adjusted EPS of around $3.30, compared to the prior estimate range between $3.47 and $3.53. Nevertheless, the new forecast still represents an earnings increase of 4% from the 2024 result of $3.18.

Shares of e.l.f. are trading at 22 times its consensus 2025 EPS as a forward price-to-earnings (P/E) ratio, relatively more expensive compared to Ulta Beauty at a forward P/E of 16. Still, its main advantage continues to be a stronger growth outlook, which helps justify its premium valuation.

ELF Operating Revenue (Quarterly YoY Growth) data by YCharts

Decision time: I like e.l.f. Beauty

I'm bullish on both Ulta Beauty and e.l.f. Beauty in the sense that the sell-off in their share prices has gone too far. Forced to pick just one as the best stock to buy right now, however, I believe e.l.f. Beauty may have more room to outperform in 2025. In my view, the company's positioning is more differentiated on the products side of the beauty industry, with a greater potential as it expands internationally.

For investors with a long-term time horizon, e.l.f. Beauty stock may make a great addition to a diversified portfolio.

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Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Ulta Beauty and e.l.f. Beauty. The Motley Fool has a disclosure policy.