Lululemon Athletica's (NASDAQ:LULU) Potential Seems Priced-In

Stjepan Kalinic
June 07, 2022
Source: Shutterstock

Through the 2020 downturn, Lululemon Athletica (NASDAQ: LULU) established its position as a premium apparel brand that benefited from the pandemic, recovering the losses within weeks and going on a streak to become a multi-bagger stock.

While broad market weakness forced it to give back all the gains, the company seems to defy the ongoing trends – posting profits and raising guidance for the year.

Check out our latest analysis for Lululemon Athletica

First quarter 2023 results:

  • EPS: US$1.48 (up from US$1.11 in 1Q 2022).
  • Revenue: US$1.61b (up 32% from 1Q 2022).
  • Net income: US$190.0m (up 31% from 1Q 2022).
  • Profit margin: 12% (in line with 1Q 2022).

Revenue exceeded analyst estimates by 4.4%. Earnings per share (EPS) also surpassed analyst estimates by 3.5%.

Over the next year, revenue is forecast to grow 20%, compared to an 11% growth forecast for the industry in the US. Over the last 3 years, on average, earnings per share have increased by 24% per year, whereas the company’s share price has risen by 20% per year.

Although the operating margin fell by 40 basis points, the company still scored a 32% increase in revenues compared to the last year. CFO Meghan Frank noted that while the company is not immune to the ongoing impacts of supply chain disruptions, its business model is successfully navigating those challenges.

The company raised its FY expectations.

  • Net Revenue: US$7.61b- US$7.72b vs. prior US$7.49-US$7.62
  • EPS: US$9.35-US$9.50 vs. prior US$9.42-US$9.57

The institutional response was mostly positive, with Morgan Stanley and BTIG reiterating their Overweight / Buy ratings, while B. Riley Securities lowered its price target to US$377 (from US$440).

What's the opportunity in Lululemon Athletica?

The stock is currently trading at US$301 on the share market, which means it is overvalued by 40% compared to our intrinsic value of $215.14. This means that the opportunity to buy Lululemon Athletica at a reasonable price isn't there at the moment.

If you like the stock, you may want to keep an eye out for a potential price decline in the future. Given that Lululemon Athletica’s share is somewhat volatile (i.e., its price movements are magnified relative to the rest of the market), this could mean the price can sink lower, giving us another chance to buy in the future. The stock has a relatively high Beta of 1.3, meaning that, on average, it moves 30% more than the broad market.

What kind of growth will Lululemon Athletica generate?

NasdaqGS: LULU Earnings and Revenue Growth June 6th, 2022

Investors looking for growth in their portfolio may want to consider a company's prospects before buying its shares. Although value investors would argue that it’s the intrinsic value relative to the price that matters the most, a more compelling investment thesis would be high growth potential at a low price. With profit expected to grow by 58% over the next couple of years, the future seems bright for Lululemon Athletica.

What this means for you:

Are you a shareholder? LULU’s optimistic future growth appears to have been factored into the current share price, with shares trading above their fair value. However, this brings up another question – is now the right time to sell? If you believe LULU should trade below its current price, selling high and repurchasing it when its price falls towards its real value can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on LULU for a while, now may not be the best time to enter the stock. The price has surpassed its estimated valuation, so there’s no upside from mispricing. However, LULU's optimistic prospect is encouraging, which means it’s worth diving deeper into other factors to take advantage of the next price drop.

We wouldn't consider investing in stock unless we thoroughly understood the risks. To help with this, we've discovered 2 warning signs that you ought to be aware of before trading any shares in Lululemon Athletica.

If you are no longer interested in Lululemon Athletica, you can use our free platform to see our list of over 50 other stocks with high growth potential.

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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