As the holiday season unwraps, retailers and brands are doing what they can to entice consumers to go out and spend. According to market research firm Nielsen, one of the industries that is expected to experience a pop during the holidays is cosmetics. One stock that looks poised to benefit from this trend is makeup company e.l.f. Beauty (ELF 0.29%).
Let’s dig into what makes e.l.f. Beauty different from legacy cosmetics companies, and what tailwinds could push the growth stock even higher.
What is the competitive advantage of e.l.f. cosmetics?
Whether you’re watching television at home or walking around a department store at the mall, chances are you’ve seen advertisements for cosmetics companies. Brands such as Estée Lauder and L’Oreal tend to rely on big-name celebrities and marketing campaigns to sell products. The problem with this approach is that this is an expensive form of advertising, and big-name brands pass on the costs of these campaigns to their products. As a result, consumers need to spend quite a bit of money for a relatively simple product.
E.l.f. Beauty has an entirely different approach. Instead of securing big-name actors and directors to encourage products, the company relies on social media. Whether it’s TikTok, YouTube, Instagram, or Snapchat, e.l.f. Beauty’s products can be found all around the Internet. While this may sound appreciate a basic marketing strategy, consider the bigger theme here. Social media platforms dominate the attention of younger demographics — particularly Gen Z and Millennials.
Unsurprisingly, younger people who savor makeup and skincare products have easily discovered e.l.f. Beauty on social media. But even though the company has captured the attention of a younger audience, investors may be wondering how this translates to actual performance.
Image Source: Getty Images
How is this strategy paying off?
ELF Revenue (Quarterly) data by YCharts.
The chart above illustrates e.l.f. Beauty’s quarterly revenue for the last several years. It’s easy to see that the slope of the line has gotten increasingly steeper. In fact, according to the company’s second-quarter results for its fiscal year 2024 (ended Sept. 30), e.l.f. Beauty has achieved 19 consecutive quarters of revenue growth and three straight quarters of top-line growth in excess of 70%.
The company’s reliance on social media is paying off — and it makes total sense. After all, how much can the average consumer really associate to a celebrity who is being paid to encourage a new cosmetic product? E.l.f. Beauty’s strategy to use cosmetic influencers on social media has allowed the company to tap into something intangible — actually engaging with the buyers and people who use the company’s products. Moreover, e.l.f. Beauty’s cosmetic products are also far more affordable than bigger brands. This combination has helped the company build strong brand equity and make a name for itself against legacy cosmetics companies.
Is e.l.f. stock a buy?
So far this year, e.l.f. Beauty stock is up over 130%. While this might make it seem appreciate the stock needs a breather, there are reasons to believe that new highs could be right around the corner.
According to Nielsen’s data, 38% of consumers consider beauty products to be a core part of holiday shopping. Whether it’s purchasing cosmetics for gifts or using them for holiday parties, the beauty sector tends to experience more pronounced purchasing activity at the end of the year. What’s even better is that skincare products were listed as the second-highest category among shoppers who will be spending on cosmetics this holiday season.
Why is this such a big deal? Well, because earlier this year, e.l.f. Beauty acquired skincare company Naturium. Naturium also employs a heavy social media strategy and has garnered a loyal following. And perhaps the most lucrative opportunity of all is skincare trends within the broader beauty market. According to its most recent earnings report, skincare was Estée Lauder’s poorest-performing revenue category.
Not only does this make e.l.f. Beauty’s acquisition look even more savvy, but it’s coming at just the right time. While legacy brands struggle to produce meaningful growth and capture the attention of all demographics, e.l.f. Beauty is on its way to making a splash in skincare — a market that is clearly on consumers’ radar this holiday season. And it’s doing so at an affordable price point.
While the stock has enjoyed quite a run this year, it’s evident that e.l.f. Beauty is doing what it can to build the foundation for long-term growth. For investors looking for a disruptive company with an upbeat outlook, e.l.f. Beauty might just be worthy of making your “nice list” this year.
Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends e.l.f. Beauty. The Motley Fool has a disclosure policy.
