Is ELF Beauty Stock Finally Ready to Explode?! | ELF Stock

[00:00:00]If you own Elf Beauty stock, this company had its biggest year ever.

[00:00:04]Record sales, record growth, and the profit almost gone. Net income for the period was just $26 million. Their worst profit year in 3 years. But the reason why might have you surprised. This is E.L.F. Beauty, the number one mass cosmetics brand in America. Loved by Gen Z, sold at every major retailer. And right now, Wall Street is freaking out.

[00:00:28]My name is Ken Freeman. I'm a Rucker Business School professor, CFA Charter Holder, and I have spent over 20 years on Wall Street. I ran money at a hedge fund. I consult for the SEC and train the analysts at JP Morgan, Morgan Stanley, and BlackRock. The people who decide where your money goes. I went inside ELF's 10K filing, and what I saw changes everything. I call it the real growth test. ELF just bought a beauty brand from Haley Bieber for a record amount. And that purchase is hiding what's happening to the original cosmetics business. On August 12th, the next earnings will tell you the truth.

[00:01:00]Either the original ELF brand still has growth or the stock has a much bigger problem. So, is ELF Beauty the buy of the year or are bears finally right?

[00:01:09]Start where the bears live. Total revenue for the year was $1.6 billion, up 25% in a year. On paper, a monster year. Now, check what they actually kept. Operating income fell to $73.6 million. A year ago, it was $158 million. Almost cut in half. More money in, less money kept. And the gross margin tells you why. 70.7% this year, 71.2% last year. The filing blames tariffs. Most of their product is sourced from China. China product carries a 25% tariff. So why is revenue still going up? The answer is the rest of this video. To understand what is going on, you have to know how Elf makes money. Picture a 17-year-old in Houston, Texas. She is on Tik Tok. She sees a viral video of a lip product that costs $8. She walks into Target after school.

[00:02:02]She grabs the E.L.F. version. Same finish, one quarter the price. She also grabs a Haley Bieber road lip tint. Same shelf, same checkout. This is E.L.F. in one sentence. Affordable cosmetics built for Gen Z. E.L.F. makes money two main ways. First, retailers. 76 cents of every dollar they sell. Target, Walmart, CVS, Sephora, retail shelves, real foot traffic. Second, e-commerce, the other 24 cents. ELF Cosmetics.com and Amazon.

[00:02:33]Direct to the customer, higher profit per sale. Here is what no other beauty company has. Every year, E.L.F. spots a Gen Z trend on Tik Tok. They copy the formula at a fraction of the price, and they get it to Target shelves in months.

[00:02:47]Legacy beauty giants take years to do that. Speed plus marketing dollars, that is the moat. They spent $399.8 million pushing it this year. 24% of every dollar back into ads. So, with an engine running like that, what is breaking? If this is the kind of research you want, smash like and subscribe right now. It keeps this Wall Street level analysis completely free for you every week. When something is wrong with the business, the warning signs hide in the numbers. I found four of them and they are serious. Watch how much money this company keeps out of every dollar they bring in. Two years ago on 1 billion of sales they earned $127 million. Last year on 1.3 billion of sales they earned $112 million. This year on 1.6 billion of sales they earned $26 million. Sales up, profits down.

[00:03:36]Profits down to less than 2 years ago with 60% more revenue than 2 years ago.

[00:03:41]This is the bare case in two lines on one page. It gets worse. Watch this next one. On page 76 of the 10K, there is a line that did not exist last year. It's called change in fair value of contingent consideration. Dense term.

[00:03:55]Here's what it means. When E.L.F. bought Haley Bieber's brand, they offered the seller a bonus. If the brand sells more than expected, ELF has to pay up to $200 million extra. That is on top of the $897 million already paid. Here's the part that shocked Wall Street this year.

[00:04:11]That earnout cost them $57.6 million on the income statement because the brand is doing too well. You read that right.

[00:04:20]Their hot new brand is hitting earnings targets and that success is destroying their profit. And this expense will come back next year. Up to $200 million in total is still owed. To buy Haley Bieber's brand, ELF did something they've never done. They piled debt onto the balance sheet. Last year, total debt was $256 million. This year, $841 million from a4 billion to almost a billion in just 12 months. Debt comes with an interest bill. Interest expense this year was $35.3 million, up 21.5 million from last year. Every dollar going to the bank is a dollar not going to shareholders. The term loan matures March 2030 at a variable rate. If interest rates climb from here, that bill climbs with them. When a company buys another brand, the price paid above what the business is worth gets recorded on the balance sheet. Accountants call it goodwill. Last year, El's goodwill was $340 million. This year, it jumped to $853 million plus intangible assets, the road brand name itself. Intangibles went from 207 million to 553 million in 12 months. Total assets on the books are $2.4 billion. Almost 60% of that is in cash, factories, or inventory. It's the value that Elf assigned to the road brand. If Haley Bieber's brand misses targets, the accountants will write that value down. If Road misses expectations, ELF will have to admit that it overpaid.

[00:05:49]And that mistake will slam earnings overnight. Four red flags. That is the entire bare case. Most retail investors stop watching here. You did not. So, with all that pain on the surface, what is the upside for bulls? Here are four green flags and they are promising.

[00:06:04]Forget the P&L for a second. Cash is what actually pays the bills and the cash tells a totally different story.

[00:06:09]Cash generated from running the business was $212.5 million this year. Last year it was $133.8 million. Cash flow grew 59% in a year. How can profit fall and cash flow rise? Because the Haley Bieber earnout charge is on paper. The company never wrote a check. The cash is real.

[00:06:29]The pain is accounting. Wall Street is reading the wrong line. Remember those two ways that ELF makes money? The e-commerce side just had its best year.

[00:06:38]Direct to consumer sales grew by 144.7 million or 63% in a year. 63% is a hyper growth number and that is their highest margin channel. No retailer cut, higher profit per sale. While Target and Walmart get slower, their own website is on fire. Mix shifts towards profit even if the top line slows. Look at what they bought to fix the slowdown. Hilly Bieber's Road delivered 390 million in net sales this past year. It grew over 80% in a year. It just launched at Sephora in Q3 and management told Wall Street that road will add nine points to next year's growth. Maybe they overpaid.

[00:07:17]The earnout hurts, but this brand is a real growing business. If you bought the company for the brand, the brand is doing exactly what you bought it for.

[00:07:25]When debt scares people, check the cash.

[00:07:28]ELF is sitting on 289.7 million of its own money as a safety net. The credit line has another 243.3 million still untouched. Add it up over half a billion dollars in liquidity. That covers the Haley Bieber earnout two and a half times over. This company is not going bankrupt. With my YouTube membership, members can ask any questions they have about this stock or others live. The link is in the description if you want in. Four red flags, four green flags. So when Wall Street looks at all of this, where do they actually land right now?

[00:07:59]16 analysts cover Elf Beauty. The consensus rating is outperform. The Wall Street medium price target is $71. With the stock around 64 today, that implies upside of 11%. JP Morgan moved first the day after earnings. They cut the price target from 85 to 80, but they kept the overweight rating. Overweight is Wall Street code for still a buy, but it's worth less than a month ago. JP Morgan still believes, but the conviction just dropped. Morgan Stanley is the bear in the room. They cut the price target to 59, below where the stock trades today, and the reason they gave was brutal.

[00:08:33]Quote, "The base ELF cosmetics brand has slowed to low singledigit growth in 12 weeks. The legacy brand is stalling.

[00:08:41]Last week, Bernstein started coverage.

[00:08:43]Market perform price targets 60, right below the current stock price."

[00:08:48]Bernstein is saying that you make zero from here. Dead money. Put the three firms side by side. JP Morgan says 80.

[00:08:55]Morgan Stanley says 59. Bernstein says 60. Every single one of them cut or set targets at or below where they used to be. Nobody on the street raised their target. And this is after the company beat earnings. That tells you what they really think. So, what does the institutional grade data say? The smart money on Wall Street. Let's cover that next. Cap IQ is a $25,000 per year subscription that I'm showing you guys today for free. If you want to invest like the pros, you need to see what the pros see. The analysts that I trained at the top banks across Wall Street all use Cap IQ. Here is the ELF beauty valuation dashboard. Wall Street has a low value for ELF of 50 and a high value of 90.

[00:09:33]The median is $71, which is 11% upside to today. The overall rating is 1.83, which is an outperform rating. For that median to be achievable, three things must be true. The original ELF brand has to reacelerate back to double-digit growth this fiscal year. Haley Bieber's road has to keep growing fast enough to justify the $897 million paid. The tariff bill has to stop crushing margins. Gross margin has to stop compressing. Cap IQ does not give certainty, but it shows us what the biggest investors on the planet are betting on. The street has a $71 median target, but Morgan Stanley says 59. And insiders are selling right here. So, which side of this trade is actually reading the numbers right? At the start of this video, I introduced you to the real growth test. The question was simple. When you strip out the Haley Bieber brand, is the original ELF business still growing? If yes, the Bulls win. If no, you're paying for a story. Here is the honest answer. Haley Bieber's brand contributed 293.5 million to ELF's growth this year, which leaves the original ELF brand with just 29.5 million on a base of 1.3 billion in sales. Without Haley Bieber, this company would have been dead flat, which means that the real growth test is failing. Check who buys the product wholesale. Target was 18% of total sales. Walmart 13%, Amazon, 11%, Sephora, 10%. Add those four up, 52% of total sales. Half of this company runs through four doors. If one of those four cuts shelf space next quarter, you do not lose 1% of revenue, you lose 10%.

[00:11:12]That is the buried risk that Wall Street is missing. If the viral name made you want to buy this, your brain just played you. I broke down that exact bias in my Monday video. The link is in the description. Here is what the bulls are right about. ELF has enough cash to survive any bad quarter. This is not a company that goes bust. This is a company that has to prove that it can grow organically. On August 12th, ELF reports Q1 of next year. That is the first clean look at growth. And this is with Haley Bieber's brand fully in the base.

[00:11:42]>> You should seek the advice of investment professional always. I do not know your individual financial situation. This content is meant to educate and is not investment advice.

[00:11:47]>> If you want the full DCF model that I'm about to walk through that lives inside the Windlike Wall Street School community. The link is in the description if you want it. That being said, my DCF model shows an implied share price of 78.25. With a stock currently sitting at 64, that implies upside of over 22%. So based on the numbers, ELF has a buy rating on Wall Street. If a stock is trading at greater than a 20% discount, it's considered a buy rating because it provides us a margin of safety. I do not currently have a position in ELF. I already have other consumer discretionary names and will maintain my current sector exposure. Pay attention to one thing moving forward. Does the original ELF brand grow above 5% in the August 12th earnings? If yes, the bulls are right.

[00:12:28]If no, the legacy brand is finished.

[00:12:31]That is the only question that matters.

[00:12:33]Are you a buyer of ELF at 64, or do you think that the legacy brand is dead? Let me know in the comments below. Next week, I'm going inside the filings of a company that retail can't stop talking about, but Wall Street has a totally different take. Subscribe so that you do not miss it. As always, be relentless.