This Growth Stock Is Down 45%. Should You Buy It Like There's No Tomorrow?

Investors willing to look around can still find potential opportunities. Even the share prices of generally high-quality businesses can take a hit due to a variety of factors. It’s worth understanding whether or not they are deserving of your capital.

There’s one notable growth stock trading 45% below its record (as of March 31), which was established in December 2023. Should you buy shares on the dip?

Worries about the economy

It’s certainly encouraging to see a business exceed Wall Street estimates. This is precisely what Lululemon Athletica (LULU 3.13%) did in its fiscal 2024 fourth quarter (ended Feb. 2). Revenue jumped 13% year over year to $3.6 billion, while diluted earnings per share (EPS) rose 16% to $6.14. That’s where the positive view ends, as shares tanked double digits following the financial update.

It’s worth mentioning that Lululemon’s growth has slowed. Fiscal 2024 showed the lowest revenue gain in at least the last decade. What’s more, investors were likely not pleased with management’s guidance. Forecasts for both revenue and diluted EPS for fiscal 2025 came in below Wall Street estimates.

There are certainly concerns about the state of the U.S. economy. Ongoing changes to trade policies add lots of uncertainty, with executive teams in a range of industries adopting a wait-and-see approach.

“The external environment remains dynamic, and there continues to be considerable uncertainty driven by macro and geopolitical circumstances,” CEO Calvin McDonald said on the Q4 2024 earnings call.

Consumers also aren’t in the best shape. Credit card debt in the U.S. is at a record $1.2 trillion and consumer confidence is at its lowest level in almost three years. This could lead to a self-fulfilling prophecy that results in curtailed spending, tipping the economy into a recession.

On the premium side of the industry

The macro backdrop can have a more pronounced impact on Lululemon’s business. That’s because it deliberately positions its apparel and footwear products at the premium end of the market. This is evidenced by its average gross margin of 57% over the past five years, well ahead of industry heavyweight Nike.

Consequently, it makes sense that consumers would delay these purchases when they foresee economic trouble ahead. Why buy expensive clothing that you might not need when you think you might face financial difficulties?

Another ongoing risk factor is the competitive nature of the industry. Lululemon faces so much competition, both from the high-end and the low-end areas of the market. Fashion tastes are constantly changing. And consumers have no restrictions on where they choose to spend their money.

This makes things difficult. To its credit, though, Lululemon has developed a strong brand over the years. Perhaps investors might give the company the benefit of the doubt, believing the current weakness will prove to be temporary.

On the discount rack

Lululemon might be known for selling merchandise that rarely goes on sale. However, the company’s stock is a different story. It currently trades at a price-to-earnings ratio of 19.1. That represents a slight discount to the overall S&P 500 index. This isn’t surprising, given that Lululemon lags the broad benchmark in the past three- and five-year periods. The multiple is also near the lowest valuation in 10 years.

According to consensus analyst estimates, Lululemon’s revenue and EPS are projected to grow at compound annual rates of 7.2% and 8.3%, respectively, between fiscal 2024 and fiscal 2027. That outlook, which should be taken with a grain of salt, is disappointing compared to historical performance.

So, I understand why some investors will proceed with caution. The weaker economic picture adds uncertainty in the near term. Additionally, competition in the industry will remain fierce.

But the cheap valuation is too hard to pass up. Investors comfortable adding risk to their portfolios should consider buying this stock like there’s no tomorrow.