e.l.f. Q3 Beat Masks Underlying Growth and Valuation Concerns

What happened

E.l.f. Beauty reported strong fiscal Q3 results that crushed estimates, led by the Rhode skincare brand's outperformance. This positive news contrasts with the DeepValue master report's 'POTENTIAL SELL' rating, which cites a 40% stock drawdown and persistent investor skepticism over slowing organic growth. The report highlights that while Rhode is scaling well, the core e.l.f. brand faces headwinds from elevated China tariffs and a permanently higher marketing cost base. FY26 guidance projects only 3-4% organic growth excluding Rhode, with flat EBITDA and lower net income, indicating underlying profitability pressures. Thus, the valuation at 64x trailing EPS remains steep, embedding unrealistic expectations for a swift return to high growth amidst structural challenges.

Implication

Rhode's strength is a bright spot but obscures the sluggish organic growth in the legacy business, which is critical for long-term sustainability. The high multiples imply a rapid recovery to mid-teens growth, yet current guidance suggests a more modest trajectory, risking further derating. Tariff mitigation efforts and increased marketing spend are compressing margins, with gross margin down to 69% and EBITDA flat year-over-year. Any shortfall in Rhode's continued ramp or in core brand re-acceleration could trigger additional multiple compression, pushing the stock toward the bear case of $55. Therefore, despite the sell-off, entering or adding to positions now carries significant risk without a margin of safety; waiting for clearer signs of improvement or a lower price is advisable.

Thesis delta

The strong Q3 results driven by Rhode do not materially change the investment thesis. The master report's concerns about overvaluation, slowing organic growth, and margin pressures remain intact, reinforcing the need for patience as isolated positive performance does not justify the current premium.