e.l.f. Stock: Is Its Rhode Buy a Genius Move or a Risky Gamble?

When the news hit on Wednesday that e.l.f Beauty (NYSE: ELF) was spending up to $1 billion to acquire a beauty company called Rhode, I quickly turned to the most authoritative expert I knew on the subject: my teenage daughter. I asked her if she had ever heard of the brand. In response, she quickly showed me her Rhode smartphone case, which securely holds a Rhode lip gloss in place.

That immediately told me that this acquisition could be transformational for e.l.f. However, I also know that not every celebrity beauty brand acquisition has worked out well for the buyer.

The Rhode to reinvigorating growth

Over the past few years, e.l.f. has been one of the fastest-growing cosmetic companies, taking significant share in the mass-market space. However, sales growth slowed to only 4% in its fiscal 2025 Q4 (which ended March 31) after growing by 40% through the first nine months of its fiscal year. Meanwhile, given the uncertainties over tariffs and the U.S. economy, management decided not to provide fiscal 2026 guidance.

Image source: Getty Images

The company was also a victim of President Donald Trump's trade war. It had to pay import taxes of more than 145% on its imports from China for a time, and while Trump has for now dialed those tariffs down to 30%, that's still a noteworthy increase in e.l.f.'s costs. Around 75% of its products are made in China. Management has said that it expects the impact of those tariffs to start showing up in its fiscal 2026 second quarter results, and announced that it will raise prices on all of its products by $1 beginning in August to help offset these costs.

However, the acquisition of Rhode, which is expected to close during its current fiscal quarter, should help reinvigorate growth for e.l.f. The Hailey Bieber-owned brand, which she only launched in 2022, has become popular among young female consumers, quickly growing its sales to $212 million over the past four reported quarters. Impressively, it achieved that while spending little on paid advertising and having only a handful of products that it sold exclusively through its own website.

Sephora stores in the U.S., Canada, and the U.K. will begin carrying Rhode products later this year, an expansion that will surely ramp up its growth even more. Importantly, Bieber will stay on as Rhode's chief creative officer and head of innovation. Meanwhile, e.l.f. has strong distribution in chains like Ulta Beauty and Target, which should further expand the brand's retail presence in later years.

Rhode is a more upscale brand than e.l.f., selling at higher price points, and while it's pretty common for beauty consumers to buy both mass-market and prestige products, Rhode should appeal to a slightly more affluent customer base. In addition, Rhode is strong in skincare, which should complement e.l.f.'s strength in cosmetics. The company has been trying to widen its footprint in the category, with moves that included buying skincare brand Naturium in 2023.

That said, not all celebrity beauty brand acquisitions have gone well. Back in 2021, Coty acquired a 20% stake in Kim Kardashian's KKW Beauty for $200 million, but the brand struggled following the acquisition. Coty recently sold its stake back to Kardashian -- presumably at a loss -- who then merged KKW into her popular Skims shapeware business. Notably, though, Coty's majority investment in Kylie Jenner's Kylie Cosmetics brand appears to be going better. Coty said that Kylie sales have grown by 1.5 times over the past two years.

Is e.l.f. stock a buy?

While the market's initial response after the deal was announced on Wednesday was tepid, e.l.f. stock shot higher after investors slept on it. While there is no guarantee that the acquisition will be a huge success, there is good reason to believe it could be transformational.

First, much of Rhode's success thus far has been driven by only 10 products or so. Its large new owner will have plenty of opportunities to really expand Rhode's assortment of skincare and cosmetic products in the coming years. In addition, e.l.f. should also be able to widely increase its retail distribution. Over the years, I've learned that investing in the stocks of companies during their distribution increase phases usually pays off handsomely.

Meanwhile, the core e.l.f. business still has solid growth potential. The brand is still in its early days of expanding internationally. Even before the Rhode deal, skincare was a huge opportunity, and it should have the ability to eventually expand into other adjacent markets like fragrance and hair care, as well.

After its recent share price gains and without the Rhode deal yet factored into analysts' estimates, the stock is still attractively valued. It currently trades at a forward price-to-earnings (P/E) ratio of 32 (based on analysts' estimates for fiscal 2026), and a price/earnings-to-growth (PEG) ratio under 0.6. A stock with a positive PEG ratio below 1 is typically viewed as undervalued, and Rhode will only add to e.l.f.'s growth.

Given the huge new opportunity it has in front of it thanks to the Rhode acquisition and its already attractive valuation, I'd be a buyer of the stock.

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Geoffrey Seiler has positions in Coty and e.l.f. Beauty. The Motley Fool has positions in and recommends Target, Ulta Beauty, and e.l.f. Beauty. The Motley Fool has a disclosure policy.