Shares of Lululemon (NASDAQ:LULU) had a red-hot start in 2019. Over a month-long stretch from late December to late January, LULU stock rallied in a nearly straight line by 30%-plus from $113 to over $150.
The rally of Lululemon stock was sparked by an easing of fears about a looming recession and the company’s holiday numbers which underscored that its brand is still on fire.
Since then, LULU stock, currently trading around $149, has been flat. That isn’t great news. Over the past month, the S&P 500 has risen more than 4%. Lululemon stock is down 2.5% during that same stretch. Over six points of relative under-performance isn’t a great thing.
But it also isn’t surprising, nor is it anything to worry too much about. What happened to LULU stock is very simple. The stock got way undervalued during the selloff of late 2018. Investors bought the dip of LULU stock. Now it’s fully valued, and it doesn’t look poised to rise much in the near-term.
But the long-term upside of Lululemon stock is compelling. LULU stock is marching towards $200, thanks to the broadening of the company’s product portfolio and increased demand for its apparel. But a lot of the near-term upside potential of Lululemon stock is priced into the shares.
As a result, over the next few weeks and potentially even months, LULU stock won’t rise much due to its full valuation. Afterwards, Lululemon stock will resume its rally towards $200. But the stock needs a bit of a breather before it does so, and that’s exactly what’s happening right now.
LULU’s Long-Term Fundamentals Remain Healthy
The long-term bull thesis on LULU stock remains healthy. Namely, Lululemon still has all the necessary ingredients to turn into a smaller version of Nike (NYSE:NKE) in the men’s and women’s athletic and casual-wear categories.
Those ingredients include an exceptionally loyal, rapidly growing customer base, second-to-none brand value, high product quality, and consumers’ willingness to pay a premium for its products. Of equal importance, Lululemon is breaking out from its niche focus on women’s yoga, and is now expanding into men’s apparel, casual-wear and footwear. In those categories, Lululemon is finding just as much success as it found in its core market.
Here’s the kicker: Nike has had nearly $40 billion of sales over the past twelve months. During that same stretch, Lululemon has reported just a hair over $3 billion of sales. Thus, the whole “Lululemon has the potential to be a mini-Nike” narrative is still in its early innings.
As long as LULU maintains high brand value and continues to expand its product portfolio and geographic reach, then Lululemon’s revenue should continue to increase 10%-15% each year.
That level of revenue growth — coupled with gross margin expansion spurred by pricing power and variable-spending leverage as a result of high revenue growth — should drive the company’s earnings per share towards $8.50 by fiscal 2023. Based on Nike’s approximate forward price-earnings multiple of 25, that equates to a fiscal 2022 price target of over $210 for LULU stock.
The Near-Term Upside of Lululemon Is Capped by Its Full Valuation
While LULU stock has upside to over $200 over the next few years, it won’t get there in the near-term.
Based on Lululemon’s fundamentals, a realistic fiscal 2022 price target for Lululemon stock is just over $210. If we take that price target and discount back by 10% per year, we get a fiscal 2018 price target of roughly $145. That is about where LULU stock trades today
Thus, based on the company’s fundamentals, Lululemon stock is fairly valued here and now. Moreover, LULU stock has fallen flat in the $150 to $160 range over the past few months, implying that investors’ appetite to buy LULU stock is clearly weak above $150 for the time being.
The Bottom Line on LULU Stock
LULU stock is a long-term winner, powered by the fact that Lululemon is expanding its reach and product assortment which will likely enable it to turn into a mini-Nike. But the near-term upside of Lululemon stock is capped by its full valuation. As a result, investors should expect the stock to trade sideways for the next several weeks before taking its next leg higher towards $200.
As of this writing, Luke Lango was long NKE.
