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Strong performance for its business could carry on into 2022. Will this propel shares to higher prices in the coming twelve months? Not so fast. Like many high-flying names, over the past eighteen months this has been a stock boosted in no small part by a “growth at any price” investing philosophy.
As monetary tightening and the prospect of higher interest rates impact this market mantra, shares will likely continue to move lower in the short-term. In fact, they have already started to pull back in recent days.
That’s not to say a tremendous tumble is in store. Yet with the prospect of LULU making a move back toward its low from earlier this year (around $300 per share), I am bearish on it at today’s prices (around $401.50 per share). (See Lululemon Athletica stock charts on TipRanks)
Changes in Market Sentiment for LULU
As seen from its most recent quarterly results (released on September 9), Lululemon continues to “crush it.”
Sales of $1.5 billion came in well ahead of analyst estimates ($1.3 billion). It handily beat on earnings as well ($1.65 per share, versus $1.19 consensus). At the time, this was enough to give LULU stock a double-digit pop in price.
Still, once we factor in what’s emerged in the weeks since its blowout earnings release, these strong numbers aren’t going to save the day. With the U.S. Federal Reserve moving ahead with tapering, bond yields are moving up.
As this trend continues, stocks like Lululemon, which are valued heavily on future results, are going to continue moving lower. Yes, continued strong quarterly performance could help soften the blow, assuming that trends continue. Yet as the risk results in the coming quarters disappoint, the company’s underlying performance could end up dialing up the pressure.
How Much Further Could Lululemon Pull Back?
If the sell-off is to continue to LULU stock, how much lower will it go? Given that its underlying business remains strong, I don’t expect shares to crater to a bargain basement price anytime soon.
Chances are that it will continue to trade a premium to rivals Nike (NYSE:NKE) and Under Armour (NYSE:UA) (UAA), which trade at forward price-to-earnings, or P/E, multiples of 31.0x and 33.5x, respectively. That is considerably lower than this stock’s current P/E ratio of 44.4x.
Moreover, both peers, which are richly-priced as well, are at risk too of seeing their rich valuations compress. Instead of trading for P/Es in the 30s, both could drift down to high 20s forward multiples.
After this reassessment happens, Lululemon could go down to a forward P/E of around 40x. Based on analyst consensus of $7.50 in earnings this fiscal year, $300 per share may be where the stock finds its floor, once the possibly in-progress market sell-off wraps up.
What Analysts are Saying About LULU Stock
According to TipRanks, LULU stock has a consensus rating of Strong Buy. Out of 17 analyst ratings, 14 rate it a Buy, 3 analysts rate it a Hold, and 0 analysts rate it a Sell.
As for price targets, the average Lululemon price target is $469 per share, implying around 16.85% in upside from today’s prices. Analyst price targets range from a low of $410 per share, to a high of $520 per share.
Bottom Line: Solid Business, Rich Valuation
Besides for valuation concerns, others may point out that it’s not set in stone that Lululemon will continue to deliver results far above analyst expectations. Some factors point to the likelihood of the company delivering underwhelming results in the coming quarters.
For instance, rising competition is a concern, and not only from Nike and Under Armour. Other names in home fitness, like Peloton (NASDAQ:PTON) are looking to grab a piece of the premium athletic apparel space as well.
More importantly, as the market changes its tune about growth stocks, and LULU stock remains richly priced, there’s little need to “buy the dip” after its recent move lower. Lululemon has some ways to go before getting back to a more reasonable valuation.
Disclosure: At the time of publication, Thomas Niel did not have a position in any of the securities mentioned in this article.
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