When it comes to stocks in the beauty industry, the first name on the lips of many right now is Ulta (NASDAQ: ULTA). It was recently revealed that legendary investor Warren Buffett purchased shares of Ulta through his company Berkshire Hathaway (NYSE: BRK.B). Understandably, buzz often circulates around Berkshire’s new positions. However, there is another beauty stock that Wall Street analysts see as having a significantly higher upside.

That stock is e.l.f. Beauty (NYSE: ELF). The average price target for the stock is nearly $210. This implies a potential upside of around 86% from current levels. In comparison, the average price target for Ulta signals an upside of just 2%.

However, looking at these figures is only one piece of relevant data to consider. I’ll examine the operations of the consumer staples company and provide some insight on how it differs from Ulta. I’ll look at the trends in the firm’s recent financial and detail the company’s opportunities and challenges.

e.l.f. Beauty: Prestige Grade Products at a Discount

Thinking about e.l.f.’s value proposition for customers, it comes down to two things: quality and affordability. The company prides itself on selling high-quality cosmetics at a price lower than its competition.

In its annual report, the company states its e.l.f. Cosmetics products have an average price point of approximately $6. This is in comparison to between $9 and $20 for other cosmetics brands. The company also emphasizes that its products are vegan and cruelty-free.

This is another differentiator, as many of the large cosmetics companies don’t claim this moniker, allowing e.l.f. to attract customers for whom this is an important issue. This may be a significant competitive advantage, especially with the younger generation.

A survey by UNiDAYS, a British platform where college students can get discounts on various products, found that 43% of Gen Z customers never buy beauty products tested on animals.

e.l.f. is a significantly different business from Ulta. e.l.f. is a cosmetics brand, while Ulta is a retail chain where one can buy e.l.f. products. In fact, Ulta is one of e.l.f.’s largest customers, accounting for 16% of the firm’s total revenue in the last fiscal year.

A Pretty Financial Picture: Profitable Growth and Increasing Market Share

Over the last few years, the company has achieved impressive revenue growth and increased profitability. Total quarterly revenue has nearly tripled since Jun. 2022. Last quarter, revenue grew 50% from the previous year.

Although this is impressive, it is significantly below the over 70% revenue growth seen in the five quarters prior to the most recent results. The company has achieved 22 consecutive quarters of sales growth, another praiseworthy feat.

The operating margin for the last twelve months is several hundred basis points higher than two years ago; however, it has dropped 400 to 500 basis points from the peak levels achieved in Sept. 2023. However, the gross margin has continued to increase, showing no significant drop-off.

Additionally, the company is taking market share from big players in the space. Consumption of its color cosmetics products increased by 26% last quarter, compared to a decrease of 1% for the industry.

An International Footprint Can Cut Both Ways

International expansion is one area where the firm has a significant opportunity to reignite growth to those higher levels. International revenue only makes up 16% of the firm's total revenue, compared to 70% for major public competitors.

The company is expanding into Germany, the largest cosmetics market in Europe, where it will be in 1,500 Rossmann stores. Due to bans in Europe around animal testing, the continent “dominates the vegan cosmetics market," accounting for 34% of industry revenue in 2022.

There certainly are significant opportunities for e.l.f., but there are also risks. One is tariffs, as around 80% of the company’s production comes from China. CEO Tarang Amin said tariffs as high as 60% have been rumored. The company’s overall lower price point would allow it to stay competitive despite potential tariffs, but they would likely eat into margins. Still, there is nothing concrete to go off here yet.

The company’s valuation is also elevated. Its 32x forward P/E ratio is the highest among U.S. and European personal care product stocks, with market caps of over $2 billion. Another important potential tailwind to mention is the possibility of a rate-cut regime. Most expect the Federal Reserve to cut rates at its next meeting. If rate cuts continue after that, firms like e.l.f. should eventually benefit as the consumers feel less financial pressure.