Ulta Beauty (ULTA) is back in focus after a turnaround year under CEO Kecia Steelman, as investors consider how renewed leadership momentum and fresh digital partnerships, including Wavytalk’s debut on Ulta.com, could affect the stock.

Recent share price moves suggest interest is building again, with a 34.69% 90 day share price return and a 10.22% year to date share price return contributing to an 87.16% 1 year total shareholder return.

If Ulta’s rebound has you considering what else could be positioned for long term growth, take a look at 23 top founder-led companies as a fresh source of ideas.

With Ulta shares around $683 and trading slightly above the average analyst target of about $677, the key question now is whether the turnaround story still offers upside or if the market is already pricing in future growth.

Most Popular Narrative: 59.9% Overvalued

The leading narrative on Ulta Beauty pegs fair value at about $427.41, well below the recent $683.40 close, and builds a case around quality and competitive position.

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 suss out 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 doesn’t leave a whole lot of room for an edge. Morningstar has the following to say: “We believe it carries more products and brands in the major beauty categories of makeup, hair care, skin care, fragrance, bath, and accessories than any other US specialty beauty retailer. According to the National Retail Federation, Ulta and wide-moat LVMH’s Sephora are the only two specialty beauty retailers among America’s 100 largest retail companies. Although Ulta faces significant and increasing competition, we believe it has a unique market position and loyal customers. As evidence of its competitive edge, its adjusted return on invested capital, including goodwill, has consistently been above our 9% estimated weighted average cost of capital. We estimate Ulta''s adjusted ROIC, including goodwill ROIC, will average 27% over the next decade… We view Ulta''s ability to thrive in a very crowded marketplace as evidence of a competitive edge… We view Ulta''s strong margins as evidence of its competitive edge… We think Ulta''s salon services with 8,000 stylists provide a competitive advantage. The $60 billion (IBISWorld estimate) US hair salon industry is very fragmented, as national chains (such as those franchised by Regis) have less than 10% share… We believe Ulta has opportunities for store growth despite its large base. The chain has expanded rapidly, having added about 1,000 locations since the end of 2008. As Ulta now has stores in all 50 states and all major metropolitan areas, we believe its store openings will slow. Unlike some competitors (including Sephora), Ulta has no stores outside the US. The firm had planned to enter Canada in 2021, but this expansion was put on indefinite hold. Instead, Ulta''s first international expansion will be into Mexico through a partnership with Grupo Axo… Due to the ease of launching products online and marketing them through platforms like Instagram, it has never been easier to launch new beauty products. Many of them fail, but some of them have found success. Ulta has been proactive in seeking new brands and offering them in its stores… We estimate Ulta will achieve 4% compound average sales growth over the next 10 years, well below its 16% average annual sales growth over the past decade. We forecast 4% yearly same-store sales growth in the long term.”

Curious how solid margins, loyalty economics and a slower sales glide path can still justify a much lower fair value than today’s price? The narrative leans heavily on measured revenue growth, steady profitability and a future earnings multiple that contrasts sharply with where shares trade now. If you want to see exactly how those moving parts connect to $427.41, the full story is worth a closer look.

Result: Fair Value of $427.41 (OVERVALUED)

However, sharper competition or weaker same store sales could challenge assumptions on margins and growth, and could quickly change how that $427.41 fair value looks.

Another View: Earnings Multiple Sends Mixed Signals

While the leading narrative calls Ulta Beauty overvalued at $683.40 versus a $427.41 fair value, the earnings multiple tells a more nuanced story. Ulta trades on a 25.5x P/E, which sits below a 32.5x peer average but above the US Specialty Retail industry on 21.4x.

Our fair ratio sits lower again at 18.1x, which implies the market could shift toward a cooler view if sentiment or growth expectations soften. That split between 25.5x today, 21.4x for the industry and an 18.1x fair ratio raises a simple question for you: how much valuation risk are you really comfortable with here?

Next Steps

If the mixed signals here leave you unsure, that is a useful starting point, not a problem. Move fast to check the company’s 1 key reward and decide what those strengths mean for your own thesis.

Looking for more investment ideas?

If Ulta has sharpened your focus, do not stop here, broaden your watchlist now so you are not looking back wishing you had acted earlier.

• Spot potential value opportunities early by scanning our list of 54 high quality undervalued stocks that pair quality fundamentals with prices that may not fully reflect them yet.
• Build a sturdier core to your holdings with solid balance sheet and fundamentals stocks screener (44 results), highlighting companies that carry less financial strain on their books.
• Lock in potential portfolio income by reviewing 13 dividend fortresses, featuring companies with higher yields that could support regular cash returns.

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.