Downgrade ELF to Hold; price ($107) exceeds DCF fair value ($55) and margin expansion lags revenue growth.

e.l.f. Beauty reported 36% year-over-year net sales growth with a gross profit margin increasing to 83% thanks to partly to refunds of tariffs the company paid earlier that were rejected as illegal by the Supreme Court of the United States.

The company revised its outlook for 2026 higher, now expecting revenue growth of 19% at the midpoint, up from the previously forecasted 13% at the midpoint. Of course, all of this is leading to an increasing share price as e.l.f. Beauty stock is now up over 40% year-to-date in 2026.

And of course, I'm happy about that because I ranked e.l.f. Beauty stock as a buying opportunity in late March, so I'm happy to see the share price soaring.

But does this make it a buying opportunity still? Well, let's take a deeper dive and answer that question together.

So, over the years, e.l.f. Beauty has seen its revenue soar as it offers affordable products and continues aggressive marketing to facilitate sales. Its recent partnership with Target and others is helping to expand its distribution network to additional channels.

Additionally, the company is diversifying its supply chain outside of China since that's the country that's being hit with the highest tariff rates. The management team said that less than 60% of its manufacturing will be in China by the end of this year.

Revenues overall have soared to 1.7 billion, and the management team is forecasting near 20% growth ahead, suggesting that they'll use some of those tariff refunds to increase marketing activity to lower prices further still.

While its revenue growth has been consistent and aggressive, its profit margin expansion has been more volatile. Its operating profit margin over the trailing 12-month period was 12% and it's reached as high as 17% and as low as 3% over the previous decade.

No clear increase in its operating profitability as the management team continues its aggressive promotional incentive and discounting programs to expand sales and gain market share.

Worse, still the company's return on invested capital has fallen significantly from the high water mark of around 23% down to just 3.17%.

I talk a lot about how companies can generate sales by increasing promotional activity and that's not really demonstration of organic demand for the company's products.

More powerful of a signal is when a company is growing sales and their profit margins and profits are increasing in kind. e.l.f. Beauty is not demonstrating that. They're demonstrating growing revenue, but it's mostly resulting from increasing marketing activity, whether it be promotions, discounts, incentives, acquisitions, new products, new distribution deals, etc., etc.

e.l.f. Beauty is now trading at a forward price to earnings of 28, which is still on the lower end of where this stock has traded for according to this valuation metric going back to late 2023.

Now, while sales growth is impressive, the company's lack of improving profitability is a little bit concerning when I'm comparing it to its valuation. If the valuation was cheaper, I wouldn't be picky about this factor, but since it's trading at a forward price to earnings near 30, I want to see sales growth coupled with expanding margins to solidify the signal I'm getting about its demand.

The stock is up over 40% year-to-date and of course the last time I evaluated the company was on March 23rd, 2026 where I ranked it as a buying opportunity.

You could see on March 23rd, this stock was trading at a price market price of around $70 per share and it's since risen by over 50% and is now trading at $107 per share.

Today, I also updated my discounted cash flow valuation for the company and I calculated a fair value of the business around $55. The current market price is $107.

So, it looks to me like the valuation, the market price has increased quicker than the fundamental performance of the business has increased.

Therefore, while I did see this stock as a buying opportunity around the $65 to $70 price level, at over $106 per share, it does not look like as an attractive buying opportunity.

So, all that being said, I will be downgrading Elf Beauty stock to a hold from a buy and I'm updating that ranking on August 26th, 2026.