Compared to a year ago, the stock price of Ulta Beauty (NASDAQ: ULTA) is down 33%, and e.l.f. Beauty (NASDAQ: ELF) has experienced a whooping 66% drop!
While these significant declines certainly captured my attention, the words from Chin of The Smart Investor echo in my mind, “Buy because you want to own the shares for the long haul, not because share prices have become cheaper.”
At this moment, I’m not certain if I’ll hold these two stocks indefinitely, but their businesses, combined with their current valuations, presented a timely opportunity as I sought to diversify my tech-heavy growth portfolio.
Join me as I unpack this beauty discovery and share why I decided to initiate a position in these two beaten-down stocks.
Ulta Beauty
As the largest specialty beauty retailer in the US, Ulta Beauty distinguishes itself by offering a comprehensive range of products catering to both mass-market and prestige segments, complemented by in-store salon services.
By the end of fiscal year 2024, the company’s extensive network comprised 1,445 stores across the United States.
While Ulta doesn’t have a presence in Singapore, you’re likely familiar with its direct competitor, Sephora, whose flagship store in ION Orchard offers a comparable experience within the specialty beauty retail environment.
Ulta’s dominant position in this intensely competitive field is undeniable, a success largely credited to the transformative vision and strategies implemented by former CEO Mary Dillon. Following the initial recovery from the COVID-19 pandemic, Dave Kimbell’s team sustained momentum for a while, but progress notably slowed in FY 2024.
Although attributing this entirely to his leadership would be an oversimplification, my earlier decision to divest from Ulta in 2021 was partly informed by what I perceived as a less compelling strategic direction under his guidance, even at that time.
My current investment in Ulta is primarily motivated by the significant decline in its stock price over the past year and a cautious optimism for a potential resurgence under the leadership of the new CEO, Kecia Steelman.
I was particularly encouraged by her initial earnings call, where her emphasis on the customer experience, rather than solely focusing on immediate results, resonated with me.
While interconnected, prioritising the customer journey in messaging can foster a stronger connection among staff and, consequently, with customers – a crucial human element in this competitive landscape.
Assuming Ulta achieves at least the lower end of its earnings per share guidance of US$22.50 for this fiscal year, the current stock price of US$357 translates to a forward price-to-earnings (PE) ratio of approximately 16x.
This, in my view, represents a reasonable valuation for a market-leading retailer, with the potential for a positive re-rating if its new “Ulta Beauty Unleashed” plan successfully reignites its growth trajectory.
e.l.f. Beauty
e.l.f. Beauty initially capitalised on a sweet spot in the market. Its offering of high-quality products at budget-friendly prices directly online, resonated with their target audience of Gen Z and Millennials.
Their expansion was further fuelled by the strategic use of social media platforms like TikTok and Instagram. Collaborations with influencers who created viral content significantly accelerated their brand awareness and desirability.
This powerful combination of product, price, and digital marketing propelled e.l.f.’s growth, more than tripling both its revenue and net income from FY 2021 to FY 2024.
The market enthusiastically embraced this rapid ascent, often becoming overly optimistic about the company’s future trajectory. This sentiment drove e.l.f.’s share price to soar by over 800% during the same period, reflecting the market’s belief in continued exponential growth.
However, this euphoria proved unsustainable.
Despite guiding a robust sales growth of 25-27% for FY 2025 during their Q1 2025 earnings call, this figure paled in comparison to the high double-digit growth rates investors had become accustomed to in previous years.
Consequently, the share price experienced a sharp correction, plunging by nearly 40% over the following month as the market recalibrated its expectations.
While Q3 2025 showed signs of a potential rebound with a strong net sales growth of 31%, management’s prudent guidance for a much weaker Q4 2025, citing softer-than-expected trends in January, triggered renewed market jitters regarding the company’s immediate outlook.
Adding to these concerns were external headwinds: the ongoing uncertainty surrounding a potential TikTok ban in the US, a crucial marketing channel for e.l.f., and the potential impact of tariffs on their imported goods from China.
While e.l.f. is undoubtedly facing a period of adjustment, its proven ability to capture a significant share of the mass market among younger consumers remains a compelling and enduring market advantage.
Furthermore, the impressive 66% growth in international sales during Q3 2025 is particularly noteworthy. Although currently representing around 20% of total revenue, this segment holds the potential to be a substantial growth driver for e.l.f. in the years to come.
Considering these factors, the current adjusted PE ratio of approximately 21x appears to be a reasonable valuation for a company that still demonstrates the capability to sustain a growth rate of at least 20% moving forward.
My Investment in Ulta and e.l.f.
Faced with limited capital, I initially found myself weighing an investment in either Ulta Beauty or e.l.f. Beauty.
My familiarity with Ulta naturally created a stronger initial inclination. However, the allure of a high-growth company trading at a potentially attractive valuation, like e.l.f., also held considerable appeal.
Ultimately, I realised I didn’t need to make an exclusive choice and decided to invest in both.
However, after Ulta’s latest earnings call and further research into e.l.f., my conviction in Ulta has strengthened.
While its growth potential may be more moderate compared to e.l.f., I perceive Ulta’s business model as more resilient and its ability to achieve its objectives as more probable.
Conversely, e.l.f. presents a more exciting growth narrative, but I also recognise a higher degree of execution risk associated with its ambitious trajectory.
Consequently, I recently increased my holdings in Ulta, while maintaining a smaller, more speculative position in e.l.f..
My rationale is that if e.l.f. can successfully navigate its challenges and exceed current market expectations, my existing stake offers sufficient exposure to that potential upside.
Discover more from The Fat Investor
Subscribe to get the latest posts sent to your email.