Why e.l.f. Beauty Stock Tumbled 11% Today

MarketsMotley Fool

What happened

Shares of makeup-maker e.l.f. Beauty (NYSE: ELF) tumbled as much as 14.6% Tuesday before recovering to close the day down 11.4% -- and you're going to be shocked when you hear why.

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e.l.f. confirmed Monday night that it's going to deliver for investors exactly what it promised in its last round of financial guidance. As stated in a press release Tuesday morning, e.l.f. is on track to deliver 17% sales growth over 2016 levels in fiscal year 2017, and to grow its "adjusted net income" by 56%.

So what

The problem is that 17% sales growth and 56% profits growth work out to $270 million in sales, and $0.55 per share in profits (albeit pro forma profits). But as TheFly.com just pointed out in a note dissecting the update, Wall Street analysts had been telling investors that e.l.f. would earn $0.56 (still pro forma) on sales of $270.2 million.

See the difference? Even assuming e.l.f. delivers exactly what it's promising, and exactly what it's been promising all along, the company will still "miss" on both sales and earnings when it reports earnings in a few weeks.

Now what

Granted, we're only talking about a penny-a-share miss on earnings, and a sales miss of less than one-tenth of one percent. Given the diminutive size of e.l.f.'s miss (and the fact that it hasn't actually even happened yet), investors' decision to sell off the shares by more than 11% may seem like an overreaction. Then again, with e.l.f. stock already trading for 51 times earnings, it was priced to fall.

Tuesday's prediction of even a tiny earnings miss may have given investors the excuse that they were looking for to bail.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends e.l.f. Beauty, Inc. The Motley Fool has a disclosure policy.