Investing.com -- Morgan Stanley upgraded ELF Beauty Inc (NYSE:ELF)to "Overweight," on an attractive valuation after the stock halved from its 2024 highs. The brokerage believes the pullback presents a buying opportunity, given the company's long-term growth potential and improving trends in U.S. scanner data.
ELF continues to gain U.S. market share, even in a sluggish beauty category. Strong international expansion and growth in the Naturium business are additional drivers. Morgan Stanley (NYSE:MS) also expects easier year-over-year comparisons and potential upside in near-term revenue and EBITDA.
The stock, trading at 30x next-twelve-month earnings, is below its five-year average of 40x, which the firm views as a disconnect given the company's robust growth outlook.
“Valuation is now compelling in our minds with the stock off nearly 50% from its high and easier comparisons are now on the horizon, opposite the more difficult comparisons ELF was facing the last few quarters,” analyst added.
Brokerage noted the China tariff risk given 70% of COGS is China sourcing to the US, adding “but we believe it is mitigated by President-elect Trump's 10% magnitude comment recently.
MS said a 10% tariff was manageable and would require only roughly 2.5% US pricing to offset even before ELF utilizes other factors, adding that ELF has ability to ultimately price away tariffs with successful historical 2019/2022 price increases with low demand elasticity given its low price point.