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Is Lululemon Athletica Inc. (NASDAQ:LULU) Potentially Undervalued?

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Today we're going to take a look at the well-established Lululemon Athletica Inc. (NASDAQ:LULU). The company's stock received a lot of attention from a substantial price movement on the NASDAQGS over the last few months, increasing to US$405 at one point, and dropping to the lows of US$289. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether Lululemon Athletica's current trading price of US$302 reflective of the actual value of the large-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Lululemon Athletica’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

View our latest analysis for Lululemon Athletica

What is Lululemon Athletica worth?

Lululemon Athletica is currently expensive based on my price multiple model, where I look at the company's price-to-earnings ratio in comparison to the industry average. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Lululemon Athletica’s ratio of 39.65x is above its peer average of 10.81x, which suggests the stock is trading at a higher price compared to the Luxury industry. 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 fairly 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. This is based on its high beta, which is a good indicator for share price volatility.

What kind of growth will Lululemon Athletica generate?

earnings-and-revenue-growth
earnings-and-revenue-growth

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. Lululemon Athletica's earnings over the next few years are expected to increase by 57%, indicating a highly optimistic future ahead. This should lead to more robust cash flows, feeding into a higher share value.

What this means for you:

Are you a shareholder? It seems like the market has well and truly priced in LULU’s positive outlook, with shares trading above industry price multiples. At this current price, shareholders may be asking a different question – should I sell? If you believe LULU should trade below its current price, selling high and buying it back up again when its price falls towards the industry PE ratio 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 into the stock. The price has surpassed its industry peers, which means it is likely that there is no more upside from mispricing. However, the positive outlook is encouraging for LULU, which means it’s worth diving deeper into other factors in order to take advantage of the next price drop.

If you'd like to know more about Lululemon Athletica as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 1 warning sign for Lululemon Athletica you should be aware of.

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 a high growth potential.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St 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. Simply Wall St has no position in any stocks mentioned.