Lululemon athletica (LULU) is in focus as investors weigh a California lawsuit over allegedly fictitious online reference prices, alongside the company’s push into resale, which targets the fast growing secondhand apparel market.

Lululemon athletica’s short term share price momentum has picked up, with a 7.33% 1 month share price return. However, the share price is still down 41.41% year to date and the 3 year total shareholder return has declined 67.88% as investors weigh legal risks against resale growth hopes.

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Lululemon athletica’s share price has bounced in the last month yet remains sharply lower over the year. Is most of the reset already priced in, or does the recent move leave limited upside from here on current valuation?

Most Popular Narrative: 17.7% Undervalued

With lululemon athletica closing at $123.51 against a narrative fair value of $150, the gap between price and story is clear enough to get investors’ attention.

This is what makes a high-quality business cheap. You do not get a 24% ROIC compounder for ten times earnings when everything is running smoothly. You get it when several unrelated bad things happen simultaneously, and the algorithms stop trying to distinguish a temporary mess from a permanent one.

Want to understand why this narrative still sees upside for lululemon athletica? The core assumptions hinge on cash generation, margin repair, and how far growth can cool without breaking the model.

Result: Fair Value of $150 (UNDERVALUED)

However, lululemon athletica’s narrative could change quickly if Americas sales weakness deepens or gross margins remain under pressure for longer than expected.

Another View: SWS DCF Model Points The Other Way

The user narrative sees lululemon athletica as trading about 17.7% below a $150 fair value. Our DCF model takes a very different stance. On those cash flow assumptions, LULU at $123.51 is trading well above an estimated value of $74.19, which points to valuation risk rather than a cushion. The question for you is which story about future cash generation feels more realistic.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out lululemon athletica 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 51 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 this mix of opportunity and risk around lululemon athletica leaves you unsure, now is the time to look through the details yourself and move quickly to form your own view using the 2 key rewards.

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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.