Bear Market + Tariff Should You Buy e.l.f. Stock At Dip?

$e.l.f. Beauty Inc.(ELF)$

ELF Beauty: Why I’m Still Not Buying the Dip – Even After a 59% Decline

ELF Beauty is among the companies most significantly impacted by the recent tariff announcements from President Donald Trump. The new policy changes are poised to have material consequences, particularly for businesses with deep manufacturing exposure to China—and ELF Beauty fits that profile precisely.

The company currently manufactures an estimated 80% of its products in China. With tariffs likely exceeding 100% set to take effect at midnight on Tuesday, April 8th, 2025, the financial implications are potentially severe. Such a dramatic increase in import costs would inevitably flow through to ELF’s cost of goods sold (COGS), putting even more pressure on margins that are already under strain.

But here’s the thing—ELF was already showing signs of weakness even before these tariffs were set to kick in. Back in February 2025, the company revised its full-year outlook downward, citing a tougher macroeconomic environment and softer-than-expected trends in its core categories. That should’ve been the first warning sign to investors that trouble was ahead.

Fast forward to today: the stock is now down more than 59% year-to-date. That kind of decline naturally raises the question many of you have been asking me—has the risk already been priced in? Is this a chance to buy the dip? And my answer, based on a full review of the business fundamentals and valuation model, is this: not yet.

Let me explain why.

The Quality of ELF’s Growth Is Concerning

First off, ELF has certainly posted impressive top-line growth over the past few years. Revenues have surged from $400 million in 2022 to $1.3 billion as of the latest trailing twelve months—a more than threefold increase in a relatively short time span. On the surface, that looks great.

But dig deeper, and the story becomes a lot murkier.

Despite those revenue gains, cash flow has not kept pace. In fact, ELF’s cash flow from operations to sales ratio has declined meaningfully—from around 25% in 2019 to just 2.67% today. That’s a more than 90% decline in cash efficiency. What this tells us is that the company is spending heavily to drive growth—particularly on marketing, promotions, and advertising—rather than growing organically through word of mouth or strong repeat purchasing behavior.

As investors, we want to see a company where the product sells itself—where customers are coming back not because they saw a paid ad, but because the brand has built genuine loyalty and trust. ELF isn’t there yet.

The sales growth is real, but it’s expensive, and I’m not convinced it’s sustainable without continued aggressive spending. And now, with tariffs set to significantly increase production costs, the pressure will only intensify.

Margin Pressure Incoming

Let’s talk about what these tariffs could mean in practice.

Assuming a 100%+ increase in import costs on goods produced in China, ELF’s cost of goods sold is about to jump sharply. That leaves management with a few unpleasant options:

1. Raise prices for consumers to preserve margins, which risks a decline in unit volumes and market share.

2. Absorb the increased costs, which would reduce gross margins and potentially drag down already weak operating income.

3. A hybrid strategy, passing some of the cost onto consumers while taking some of the hit themselves.

Based on the company’s track record—and its promotional, growth-first strategy—I wouldn’t be surprised if ELF chooses to absorb a large portion of the costs in an effort to protect sales volumes. That would mean lower profitability for longer, particularly if the tariffs remain in place through 2025 and into 2026.

And it’s worth noting: ELF isn’t yet a business that’s optimized for profitability. Management has prioritized growing revenue and market share, with the goal of eventually becoming a dominant player in the beauty industry and then optimizing for margins. That’s a valid strategy, but it comes with a higher level of risk—especially when external shocks like tariffs change the economics of the business overnight.

Valuation: Still Not Cheap Enough

Let’s move into the valuation side of the equation.

Despite the steep drop in the stock price, my discounted cash flow (DCF) model—which incorporates updated assumptions on revenue, margins, and risk premiums related to tariffs—places ELF’s fair value at $43.20 per share.

That’s still meaningfully below the current market price of around $51, even though the stock is now trading near its 52-week low, and well off its 52-week high of almost $220.

To offer some further context, ELF was trading at a forward P/E ratio of over 60 just a year ago, and closer to 40 at the start of 2025. Today, it trades at just 12.2 times forward earnings, which might look cheap at a glance.

But valuation multiples alone don’t tell the full story—not when the earnings outlook is deteriorating. If forward earnings are revised downward again as a result of increased COGS and weaker margin assumptions, then even that seemingly low P/E ratio may turn out to be misleading.

I also want to highlight the relationship between return on invested capital (ROIC) and the weighted average cost of capital (WACC). This is a key metric I look at when evaluating a company’s ability to create long-term shareholder value.

At its peak, ELF was delivering ROIC levels over 25%, well above its WACC of 12.3%—a great sign. But that has changed. Today, ROIC is down to 10.34%, which now sits below the company’s cost of capital. That’s a red flag.

As long as the company is earning less on invested capital than it costs to raise and deploy that capital, it’s technically destroying value—not creating it. And unless we see a turnaround in margins or capital efficiency, that trend could continue.

Final Thoughts: My Updated Recommendation

To wrap this up: I’ve maintained a hold rating on ELF Beauty throughout 2025, and based on the current business outlook, I’m reaffirming that stance today—April 14th, 2025.

The combination of declining cash efficiency, tariff headwinds, uncertain margin outcomes, and a DCF valuation still below the current market price means that I do not believe this is a buying opportunity, even after a steep decline.

For long-term investors who already hold the stock, I don’t necessarily recommend rushing to sell, particularly if you have a high cost basis and would incur tax consequences. But I also wouldn’t be looking to add to positions here unless we see:

• A clearer plan to improve margins

• Organic growth with reduced ad spend

• Tangible improvements in ROIC relative to WACC

• Or a further drop in stock price that provides a better margin of safety

Until then, ELF Beauty remains a wait-and-see story, not a conviction buy.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

@Daily_Discussion @TigerPM @TigerObserver @Tiger_comments @TigerClub