Recent performance snapshot

Ulta Beauty (ULTA) has drawn investor attention after a mixed run in the stock, with a gain of 2.5% over the past day but a decline of about 24% over the past 3 months.

At a share price of US$520.15, Ulta Beauty’s short term share price returns have been mixed, with the 1 month return down 3.34% and the 3 month return down 24.04%, even as the 1 year total shareholder return sits at 23.32%, suggesting earlier momentum has cooled recently.

If Ulta Beauty’s recent swings have you thinking about where else growth stories might emerge, this could be a good moment to check out 21 top founder-led companies

So with Ulta Beauty trading at US$520.15, showing recent share price pressure but a 1 year return of 23.32% and only a small modeled intrinsic discount, is there still a buying opportunity here, or is future growth already priced in?

Most Popular Narrative: 21.7% Overvalued

According to a widely followed narrative, Ulta Beauty's fair value sits at $427.41, which is below the last close of $520.15, creating a valuation gap that hinges on how growth and margins evolve.

Ulta, the other company I was thinking of cutting, has a surprisingly favorable relative valuation in the beauty retail space. It has decent margins and actually is able to direct decent amounts of buybacks. Beauty products in particular make a lot of sense to be sold alongside salon services in a storefront so you can actually evaluate the high-end products in person. They have numerous private label brands and partnerships that attract customers, providing a small buffer to their expanding loyalty program. They are at their lowest ever P/E ratio right now at only 13, but with a high P/S and book ratio of 7, which is odd to me. They have a strong Return on Capital Employed (ROCE) and are free from debt. However, being a pure-play storefront with little room to grow aside from the untested waters of abroad leaves this company with a likely case of declining margins and earnings before only being able to grow modestly in the future. It is certainly a giant that can grow bigger, but the execution risk amid growing competition from e-commerce and other legacy storefronts in the US may take away their market share in areas that are already saturated with stores. Perceived undervaluation is mostly tangible under assumed multiple expansion, which does not leave a whole lot of room for an edge.

Curious what earnings path, margin profile, and future P/E assumptions sit behind that $427.41 figure, and how they square with slower expected revenue growth and a mature US store base.

Result: Fair Value of $427.41 (OVERVALUED)

However, slower expected sales growth and intense competition from e commerce and other beauty retailers could compress margins and challenge assumptions behind the current overvaluation narrative.

Another view: cash flows paint a different picture

While the popular narrative tags Ulta Beauty as 21.7% overvalued at a fair value of $427.41, our DCF model points to a fair value of $526.76. This is slightly above the current $520.15 share price and suggests the stock is trading roughly in line with its modeled cash flows.

For an investor, that kind of small gap cuts both ways. It limits clear upside but also reduces the risk that expectations are wildly off. The real question is which set of assumptions you trust more: the earnings multiple story or the cash flow story.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Ulta Beauty for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 46 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

If the mixed messages on valuation and growth expectations leave you unsure, take that as a signal to act promptly and pressure test the assumptions yourself using the 3 key rewards

Looking for more investment ideas?

If Ulta Beauty has sharpened your thinking, do not stop here. Use the screener to build a broader watchlist before the next set of opportunities moves.

• Target dependable income by reviewing companies that feature reliable payouts through the 10 dividend fortresses.
• Unearth potential bargains by scanning for quality stocks trading below modeled value using the 46 high quality undervalued stocks.
• Prioritize resilience by focusing on businesses that combine financial strength with low risk profiles through the 64 resilient stocks with low risk scores.

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.