Will Lululemon's Share Price Potentially Hit $500 by 2025?
Lululemon Athletica (LULU, decreasing by 1.58%) had a rough year, to put it mildly. While the S&P 500 has surged 27% in 2024 (as of Dec. 12), this high-end athleisure brand has seen its shares plummet instead. As of now, this stock within the consumer discretionary sector has plunged 23% in 2024 and also dropped from its high point around a year ago.
Bright-eyed investors are undoubtedly crossing their fingers for an improvement. Is it possible for Lululemon's stock to surge approximately 25% from its current price to reach $500 by 2025? Let's delve into the factors that investors need to consider right now.
A reliable performer
Despite the struggles of 2024, Lululemon has historically been a stellar performer for investor portfolios. In the past decade, the stock has skyrocketed 670%, transforming $10,000 into $77,000 – far surpassing the performance of the index of 500 large and prosperous companies.
The stellar performance of the shares can be attributed to outstanding fundamental performance. Over the 10-year period from the third quarter of 2014 to Q3 2024 (ending Oct. 27), Lululemon reported an annualized revenue growth rate of 19%. Not a single year saw a decrease in this metric, indicative of robust growth potential. This growth was fueled by a combination of new store openings and increased same-store sales.
The profits also increased at a rapid pace. During that same decade-long period, diluted earnings per share (EPS) surged at a compound annual rate of 21%. This is clear evidence of a business that can expand profitably.
Potential gains
The potential for higher earnings in the near term could push the stock price upward. According to the consensus of financial analysts, EPS is projected to rise by just 7% in fiscal 2025. This might disappoint investors, as it suggests a slowdown from previous profit growth. However, it's worth noting that Lululemon isn't performing optimally at the moment.
Its revenue through the first three quarters of fiscal 2024 only increased by 9% year over year, far below the 19% and 30% increases in fiscal 2023 and fiscal 2022, respectively. Management has been addressing challenges in the crucial U.S. market, accounting for 59% of total sales. Revenue remained flat in Q3 compared to the previous year.
Assuming that the analyst community's EPS estimate for the next fiscal year is accurate, for the stock to surge approximately 25% in the next 12 months, Lululemon would necessitate multiple expansion to reach the $500 mark.
As of now, the shares trade at a price-to-earnings (P/E) ratio of 28. This is significantly lower than the trailing 10-year average of 45 and a massive discount to the P/E multiple of 65 that the stock sold for when it reached its all-time high price toward the end of last year. This presents a highly attractive situation.
Possible conclusion
It's challenging to make precise predictions about what stock prices will do in any given time frame. In the short term, these prices are heavily influenced by investor sentiment, which is impossible to know in advance. This means that it's really anyone's guess what Lululemon shares will do in 2025.
However, I'm hopeful, and I believe it's certainly a plausible outcome that the stock could reach the $500 mark by the end of next year. The valuation at the moment is reasonable. For it to increase by 25% to a P/E ratio of around 35 during the course of 2025 would not be unusual.
Given the prospects of a favorable macro environment and lower interest rates, market sentiment has been improving recently. Therefore, I think it's definitely possible for the valuation to rise and the stock to reach that $500 level in 12 months.
Investors looking to capitalize on Lululemon's potential gains might consider allocating some of their finance into this high-performing stock. With a discounted P/E ratio of 28, compared to its 10-year average of 45, investing in Lululemon could potentially offer attractive returns, as the stock price might surge if the P/E ratio increases towards its historical levels.
Furthermore, the company's robust financial performance over the past decade, with an annualized revenue growth rate of 19% and diluted EPS surging at a compound annual rate of 21%, indicates the potential for higher earnings in the near future, which could boost the stock price.
