e.l.f. Beauty: Live Video Play

Summary

• e.l.f. Beauty trades at the post-IPO lows.
• The company has major growth catalysts at national retailers and rides the live video trend.
• The stock isn't cheap, but does offer reasonable valuation for the presented opportunity.

After spending part of the weekend at the mall visiting Macy's (M) and Sephora, my view of the beauty sector was altered. The traffic at the much smaller Sephora store was busy while the massive department store was slow and the makeup counters were virtually empty.

The visual points suggest that e.l.f. Beauty (NYSE:ELF) might have plenty of upside. The stock trades near the post-IPO lows at around $25 following disappointing 2017 guidance, providing a possible opportunity to load up on a stock set to benefit from the growth in live video.

At the start of June, Jefferies upgraded the beauty sector and initiated coverage on e.l.f. with a price target of $30. The stock is currently only worth $1.15 billion with the target placing a valuation of nearly $1.5 billion.

As one can see, e.l.f. remains a relatively small company. Ulta Beauty (ULTA) played the growth in the cosmetics and beauty segment to a nearly $20 billion valuation at the highs. The growth that the beauty retailer continues seeing should only benefit the company that claims to make luxurious beauty accessible for all.

Going back to Q1, the market was disappointed when e.l.f. guided to 2017 revenues of only up to $290 million. The consensus estimate was up at $291 million though the guidance is for revenue growth of up to 28%. The company has major catalysts via gaining shelf space at national retailers like Target (TGT) and Wal-Mart (WMT).

The stock only trades at about 4x revenue estimates suggesting e.l.f. isn't an expensive stock with that growth rate. Analysts only forecast earnings of $0.55 next year, but the beauty supplier is still in growth mode and not optimizing for earnings.

The stock remains a good way to play the selfie generation, but goes far beyond just selfies. The increasing importance of live video could play a big factor in women and even men needing more beauty supplies and especially younger ages that would be attracted to the more accessible prices of the e.l.f. cosmetic products.

A couple of issues point towards favoring a low priced brand over a beauty supply store like Ulta. The WSJ pointed out that department stores are starting to discount cosmetics and Amazon's (AMZN) Prime Day again highlights the threats to stores more than brands like e.l.f.

The key investor takeaway is that e.l.f. is positioned for the live-video movement. The stock has massive growth potential due to major catalysts at national retail stores while having a price point that avoids some of the discounting of prestigious cosmetic brands at department stores. Use recent weakness to start building a long-term position here.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.