Ulta Beauty Inc (NASDAQ:ULTA) has had a tough run. Since June of last year, while the market has rallied to new highs on tax reform hopes and super-charged earnings growth, ULTA stock has lost about a third of its value.

The secular growth narrative surrounding the cosmetics retailer has been consistently slowing for several quarters. Investors hoping for a turnaround in the company’s recent holiday quarter report were disappointed as, yet again, comparable sales growth slowed and margins compressed.

Unfortunately, slower growth for ULTA means this stock won’t get back to its $300 highs any time soon.

But at in the low $200’s, ULTA stock does look undervalued. That is why the stock is rebounding on underwhelming fourth-quarter numbers.

Overall, I see good (but not great) upside from the current $220 level. Here’s a deeper look.

Ulta’s Big Slowdown

For the past several years, ULTA stock has rode secular tailwinds in the cosmetics category to huge gains. The mainstream emergence of photo-centric apps like Instagram and Snapchat has pushed forward the “Selfie Generation” era. In this era, young consumers are hyper-concerned with their appearance. Not because they have to look pretty for photos (filters and photo-shop do the trick there). Rather, because everyone looks so pretty in photos, consumers feel like they should look “picture perfect” in real life.

Consequently, Millennials buy a lot of cosmetic products. That is why comparable sales growth at ULTA has been red-hot over the past several years (essentially 10%-plus for the past 4 years).

But that growth has cooled recently. And there are no signs of that cooling stopping any time soon. Comparable sales growth was 16% last year, started this year at 14%, ended the year at 9%, and is expected to be 7% next year. That is a pretty big slowdown. While comparable sales growth of 7% is still good, its not as good as ULTA investors have come to expect over the past several years (7% would be the weakest comparable sales growth since 2009).

The big and sudden slowdown can be attributed to a confluence of headwinds. The cosmetics category is cooling down after several years of red-hot growth. This is partly due to a normalization in the Selfie Generation trend. It is also partly due to the fact that no retail category can stay red-hot forever.

Moreover, department stores are finally starting to discount cosmetics products (something that was unheard of before Ulta started stealing significant market share). Therefore, there is more competition at lower price points.

For all the aforementioned reasons, comparable sales growth is slowing at a rapid rate. Gross margins are compressing. Operating margins are compressing even more. And ULTA stock is dropping.

ULTA Stock Still Has Long-Term Value

In the bigger picture, though, comparable sales growth is still strongly positive and will remain so into the foreseeable future thanks to the Selfie Generation. This generation has been led by Millennials (roughly 23 to 38 in age) for the past several years. But Generation Z (roughly 8 to 23 in age) is in the early innings of gaining significant purchasing power, and those are the consumers that, more than anyone else, grew up in the era of photo-centric apps.

As such, demand for cosmetics products should remain robust for the next several years as Generation Z gains purchasing power.

Gross margins are healthy and will rebound at any point department stores stop pushing deep promotions (they can’t discount into perpetuity, especially because most of them are already struggling with depressed margins of their own). Many bears point to Amazon.com, Inc. (NASDAQ:AMZN) as someone that is a more serious threat to Ulta’s gross margins. But research shows that the “try before you buy” effect is still very strong in the cosmetics world, and that in-store shopping strongly outweighs online shopping.

Moreover, ULTA has tremendous unit growth potential. The company only has 1,100 stores currently. Management thinks that number can get to between 1,400 and 1,700. That means the current cadence of 100 new stores per year is here to stay.

ULTA is also a huge beneficiary of tax reform. The company’s effective tax rate is expected to drop 15 full percentage in 2018 from its historical normal rate. ULTA is also buying back a ton of shares and has plenty of cash to do so (roughly $12.50 in cash earnings per share in 2017). The balance sheet is cash-heavy and debt-free.

In other words, the near-term outlook for ULTA stock isn’t that great. But the long-term outlook remains quite healthy, buoyed by dominant positioning in a strong demand market, big unit growth potential, and healthy financials. Consequently, while the company won’t be able to replicate on its success over the past 5 years, revenue and earnings growth should be positive over the next several years.

I realistically believe that the company can grow comparable sales at a mid-single-digit rate over the next several years. That, coupled with strong unit growth, should lead to about 10% revenue growth per year over the next 5 years. Margins should be able to rebound slightly in that time frame as department store discounting and labor pressures ease. Buybacks should also persist. Altogether, 10% revenue growth should turn in 12-15% earnings growth per year over the next 5 years.

According to data from YCharts, ULTA stock averaged a price-to-earnings/growth (PEG) ratio of 1.6 through most of 2016-17. A 1.6 PEG on 13.5% earnings growth implies a forward earnings multiple of 21.6. EPS estimates for 2018 are hovering around $10.80. A 21.6-times multiple on $10.80 forward earnings implies a fair value of just over $230.

Bottom Line on ULTA Stock

There isn’t much upside in ULTA stock from the current $220 level.

But the stock is undervalued here. At this low of a valuation, I can’t imagine investor demand remaining depressed for long. After all, there aren’t too many retailers out there where a 7% comp is considered bad.

As of this writing, Luke Lango was long ULTA.