This Magnificent Growth Stock Is Falling Hard. Is It Time to Buy?

e.l.f. Beauty (NYSE: ELF) shareholders have been on a rollercoaster ride over the past few years. The emerging makeup and skincare brand has been stealing market share from industry incumbents thanks to its affordable price points and its social media-savvy marketing strategy. Shares began soaring in mid-2022, gaining more than 700% by the time they reached the peak in mid-2024.

Unfortunately, roller coasters don't just go up. Since hitting its peak, e.l.f. stock has tumbled about 66%. While the stock is still well above its pre-2022 level, the bulk of the tremendous gains enjoyed by investors have vanished.

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Slashing guidance

A big chunk of the losses occurred after e.l.f. reported its results for the third quarter of fiscal 2025. The numbers looked good: Revenue soared 31% year over year, mostly driven by unit volume growth, gross margin expanded by 40 basis points to 71%, and adjusted net income of $43 million represented about 12% of revenue.

e.l.f. claims to have boosted its market share by more than 2 percentage points in the third quarter, bringing its streak of market share gains to 24 consecutive quarters. The company saw strength in both its e-commerce and retail channels in the third quarter, remaining the most popular brand at Target and moving into the no. 2 spot at Walmart. e.l.f. announced that it would begin selling its products at Dollar General stores in November, exposing it to a new group of potential customers.

While things generally went well for e.l.f. in the third quarter, the company experienced some softness in January that prompted a rethink of its full-year guidance. e.l.f. lowered its outlook for fiscal 2025 for revenue and earnings, and it expects second-half sales to grow by just 14% to 16%. That implies a particularly weak fourth quarter.

e.l.f. CEO Tarang Amin pointed to a few factors that may have contributed to lackluster demand in January. First, consumers stocking up in December amid a highly promotional environment likely lowered demand in January. Second, developments like the Los Angeles wildfires and the uncertainty around the TikTok ban could have shifted consumers' attention. And lastly, e.l.f. lapped the launch of its Glow Reviver Lip Oil, which was its biggest launch in the prior-year period.

While tariffs on Chinese goods won't impact e.l.f.'s fiscal 2025 results, they will likely have an impact on its fiscal 2026 results since e.l.f. heavily relies on China for manufacturing. The company will discuss this in a few months, but one reason for the extreme pessimism following the third-quarter report could be the uncertainty around the impact of tariffs. Shares of e.l.f. dropped by nearly 20% on the day following the third-quarter report.

There's still a lot to like

With e.l.f.'s growth slowing dramatically, and with the potential for a disappointing outlook for fiscal 2026, there are plenty of reasons to stay away from the stock. However, extreme pessimism can often be a fantastic opportunity for long-term investors.

While e.l.f. faces multiple headwinds that are out of its control, the company remains the top beauty brand among Gen Z, millennial, and Gen Alpha customers. In the short term, a potential TikTok ban could derail the company's marketing efforts. However, e.l.f. has been adept at leveraging new social media platforms, and the company should be able to repeat its success on whatever platform ultimately rises above the rest.

Valuation is tricky since e.l.f. will almost certainty feel a negative impact from tariffs on Chinese goods. Based on adjusted earnings guidance for fiscal 2025, e.l.f. stock trades for about 22 times earnings. Given that the company is valued at just $4 billion, minuscule compared to the industry giants, this valuation looks like a steal. However, investors should remember that earnings could decline in fiscal 2026 as tariffs eat into profit margins.

If you assume that e.l.f.'s troubles are temporary, the stock looks attractive. Volatility should be expected this year, but the stock is now about as cheap as it was before the rally that began in mid-2022. With the company on its way to becoming a beauty and skin care giant, albeit with some bumps along the way, long-term investors should consider taking advantage of the pessimism.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target, Walmart, and e.l.f. Beauty. The Motley Fool has a disclosure policy.