Once one of the prettiest stocks in the market, cosmetics retailer Ulta Beauty Inc (NASDAQ:ULTA) has turned into an ugly duckling rather quickly. Riding secular growth trends in the cosmetics industry among the selfie-focused and picture-heavy Millennial generation, ULTA stock went from $5 at the end of 2008 to $310 in July 2017. That is a huge gain.

But the growth story hit a road-bump earlier this year, when growth started slowing, competition started intensifying and margins started to look shaky. ULTA stock started to give back some of its gains. Those trends have persisted since. Ulta just reported third quarter numbers.

While they were ostensibly good, they still showed slowing top-line growth, intensifying competition, and shaky margins. ULTA stock is down nearly 10% after the report. It now trades just above $200, a far-cry from where the stock was at its peak.

But Ulta is a big-growth company with hugely positive comps and tremendous unit expansion potential. The cosmetics retailer is successfully thwarting competition while maintaining margins at a high level.

Moreover, the company is a full tax payer that should benefit from any tax reform progress that is being made in Washington. All in all, I think ULTA stock looks undervalued here. I see fundamental upside to $240.

Breaking Down What’s Wrong With Ulta

There are 3 big concerns with ULTA stock. The first is that top-line growth is coming down quickly.

Comparable sales growth has consistently trended down this year (from 14.3% at the beginning of the year to 9% expected in the fourth quarter). That ends a multi-year trend of comparable sales growth increasing which started in 2014.

The big driver of this trend reversal is a slowdown in transaction growth, meaning ULTA is having trouble adding as much incremental traffic as it used to. Some of this may be competition, while some of it may just be ULTA nearing a transaction saturation point. Regardless, sales growth is as slow as it has been since 2010.

But sales are still up 19% year-over-year. Comparable sales growth is still in the high single-digit to low double-digit range. The company is still adding a whole bunch of stores (100 new locations this year alone). Overall, growth is slowing, but it is not slow.

Given the robust unit expansion narrative on top of still strong comps, revenues should be able to rise around 10-15% over the next several years.

The other big concern is that competition is coming in a big way. Department stores are starting to heavily discount cosmetics, while Amazon.com, Inc. (NASDAQ:AMZN) is making a big push into the market. But this story has been in the market since July, and while ULTA’s sales growth has slowed, it hasn’t been a cliff dive.

In other words, ULTA successfully is maintaining market share leadership in the cosmetics space despite increased competition. Given ULTA’s off-mall locations, cosmetics-focus, and growing digital business, the company should be able to maintain its market leadership.

The last big concern is that margins are starting to show signs of weakness. Gross margins have been steady or rising for the past several quarters, but that flipped to a 110 basis point compression in gross margins last quarter.

Some drivers of the compression were near-term in nature (such as a less favorable brand mix), but other drivers will continue to pressure margins (like higher digital sales).

Overall, the most likely outlook for gross margins is flat. Meanwhile, although the operating expense rate is expected to rise next quarter, that rise is influenced by short-term drivers (the prestige boutique roll-out). Overall, the long-term trend of operating margins trending towards 15% should remain in-tact.

Bottom Line on ULTA Stock

ULTA isn’t growing as fast as it once was. But it still is growing at a fast past.

Big picture, this is a 10-15% revenue growth story with 200-300 basis points of margin expansion potential. The company is also buying back shares. Put it all together, and it is easy to see that this is a mid-teens earnings growth story over the next several years. Call it 15%.

The S&P 500 is trading at a 90% premium to its growth potential over the next several years (20x this year’s earnings for 10.4% projected growth). ULTA stock easily deserves the same premium given its big growth and huge tax rate.

That implies a “fair” 2017 earnings multiple of about 28.5. A 28.5x multiple on 2017 expected earnings of about $8.35 implies a fair value of just under $240.

I like ULTA stock below that $240 level.

As of this writing, Luke Lango was long ULTA and AMZN.