Lululemon Athletica (NASDAQ: LULU) has not had a good year, to say the least. While the S&P 500 has climbed 27% in 2024 (as of Dec. 12), the premium athleisure brand has seen its shares head in the opposite direction. As of this writing, this consumer discretionary stock has slumped 23% in 2024 as well as from its peak about a year ago.
Bullish investors are certainly hoping for things to turn around. But can Lululemon's stock rise roughly 25% from today's levels to reach $500 in 2025? Here's what investors should be thinking about now.
A strong performer
Despite a difficult 2024, Lululemon has historically been a very good performer for investors' portfolios. In the past decade, the stock has soared 670%, turning $10,000 into $77,000 -- far better than the broad index of 500 large and profitable companies.
The impressive performance of the shares can be attributed to strong underlying fundamental performance. In the 10-year period from third-quarter 2014 to Q3 2024 (ended Oct. 27), Lululemon reported 19% annualized revenue growth. In fact, there was not a single year when this metric decreased, indicating robust expansion potential. This was driven by a combination of new store openings and higher same-store sales.
The bottom line has also ascended rapidly. During that same decade-long stretch, diluted earnings per share (EPS) soared at a compound annual rate of 21%. That's a clear demonstration of a business that can scale up in an incredibly profitable manner.
Return factors
The potential for higher profits in the near term can be a boost for the stock price. According to Wall Street consensus, analyst estimates call for EPS to rise just 7% in fiscal 2025. Investors might be disappointed with this soft outlook, as it shows a slowdown from previous profit gains. But it's worth pointing out that Lululemon isn't necessarily firing on all cylinders right now.
Its revenue through the first three quarters of fiscal 2024 was up 9% year over year, which was substantially below the 19% and 30% increases in fiscal 2023 and fiscal 2022, respectively. Management has been navigating ongoing challenges in the key U.S. market, representing 59% of companywide sales, where revenue was flat in Q3 versus the year-ago period.
Let's assume the analyst community's EPS forecast for next fiscal year ends up being correct. This means that for the stock to rise approximately 25% over the next 12 months, Lululemon would need multiple expansion to reach the $500 mark.
As of this writing, shares trade at a price-to-earnings (P/E) ratio of 28. This is well below the trailing 10-year average of 45 and a huge discount to the P/E multiple of 65 that the stock sold for when it traded at its all-time high price toward the end of the last year. This presents a compelling situation.
Possible outcome
To be clear, it's extremely difficult to make accurate predictions about what stock prices will do in any given month, quarter, or year. In the short term, these prices are heavily influenced by investor sentiment, which is impossible to know ahead of time. This means it's really anyone's guess what Lululemon shares will do in 2025.
However, I'm optimistic, and I believe it's certainly a realistic scenario that the stock could hit the $500 mark by the end of next year. The valuation right now is reasonable. To see it expand 25% to a P/E ratio of about 35 during the course of 2025 would not be out of the ordinary.
Given the prospects of a favorable macro backdrop and lower interest rates, market sentiment has been improving recently. As a result, I think it's definitely possible for the valuation to rise and the stock to hit that $500 level in 12 months.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
