Why elf Beauty shares tumbled 27.2% last month

The stock of elf Beauty (ELF -0.42%) fell 27.2 percent in September, according to S&P Global Market Intelligence data. A fast-growing beauty brand that has taken market share from incumbents, elf Beauty has come to investor acclaim after accelerating revenue growth to nearly 100% in recent years. Now, it has revised down its guidance for the next fiscal year, prompting investors to flock to the stock.

Here’s why elf Beauty shares plunged again in September.

More marketing spend, less revenue growth

With its cheaper products compared to the old players, elf Beauty has become a fan favorite among young beauty shoppers in the United States and increasingly around the world. Over the past 10 years, revenue has grown 431% and reached over $1 billion in the past 12 months.

In recent years, elf Beauty has seen revenue growth from 50%. This is why the company’s price-to-earnings (P/E) ratio has risen to 100 several times over the past three years. Unfortunately, management now expects this growth to slow. For the current fiscal year 2025, elf Beauty management projects revenue growth of 25% to 27%. This is still strong, but much worse than in previous years and the reason why the stock fell this summer and in September.

Even worse, elf Beauty is growing its marketing spend at a faster rate than revenue, which is why profit margins are shrinking. In general, if you grow your marketing spend at a faster rate than your revenue, you should expect your revenue growth to accelerate. This indicates inefficient spending by elf Beauty of its advertising dollars.

Will growth continue?

The big question for elf Beauty shareholders is whether it can continue to grow revenue at a rate of more than 20% after 2025. It has minimal presence internationally, which could open up a huge market for the company. However, the market share in the United States is already somewhat high, at 12.3% for the cosmetics category. It will be much harder to gain share from this level and drive revenue growth in its home market going forward.

Even worse, elf Beauty isn’t necessarily cheap after sinking so much in September. The stock has a P/E of 50, which is way above S&P 500 average of 30, which itself is extensive. With that in mind, it’s hard to justify buying elf Beauty stock unless you believe it can grow rapidly for many years to come.