LULU is undervalued but excluded from portfolio due to uncertainty about long-term brand survival.

Lululemon's stock was worth $516 and everyone absolutely loved it. Today, the stock plummeted to below $96, a staggering 81% drop from its all-time high.

At a time when it was expensive and popular, everyone wanted to get a share of it. Now that it has become cheap and hated, hardly anyone wants it, except for one man, Michael Perry, the legend of "The Big Short," who is buying more of it as we speak .

Is this a once-in-a-lifetime opportunity to acquire a global brand at a discounted price, or is it a "fallen knife" that continues to wound whoever holds it? First, let's take a look at this amazing collapse.

In December 2023, Lululemon's stock hit an all-time high of around $516 per share . By the beginning of 2026, it had already slipped to around $211. Then, in 2026, things continued to deteriorate more and more .

Weak demand in the United States, disappointing new products , and strong new competitors had reduced its value by about 40% by June. Then 2026 became extremely bad. After another bad earnings report , the stock plunged 18% in a single day and crashed below $100 a share for the first time since 2018.

Overall, the stock is down about 54% this year alone, and a staggering 81% from its peak.

So, if I had bought at the peak, I would have lost $8 out of every $10 I invested. But, and this is very important, a drop in the share price does not necessarily mean it is a winning deal.

Also, a drop in the share price does not necessarily mean that the company is bad.

The price has dropped by 81%, but the real question we are asking in this channel is: Has the actual value of the company also dropped by 81%? Because if that doesn't happen, there could be an incredible opportunity hiding right in front of us.

And if it has dropped, this could be a painful trap.

Here's the uncomfortable truth. This is not just an overreaction from scared investors. The company's business has already deteriorated. In the last quarter, sales fell by 4%, while like-for-like sales—that is, sales in stores that have been open for at least a year, which is the truest measure of the health of retail businesses—fell by 9% globally and by a harsh 12% in the Americas alone.

Sales of its most popular women's leggings, the product on which the entire company was built, have fallen by 20%. Revenue shrank from $2.53 billion to $2.42 billion, and management acknowledged that fewer people entered the stores, fewer of them bought anything, and those who did buy spent less each time.

When those three decline at the same time, that's a real problem with demand, not a coincidence.

Management says shoppers are moving away from leggings towards looser styles , and Lululemon was surprised by this shift. So, here's the big question. Is this just a passing fashion trend that Lululemon can quickly catch up with , or has it lost its magic touch in knowing what women want to wear next?

This is not limited to America. In China , sales also declined, affected by some negative buzz around the brand and weak online shopping events . Frankly , every major region has shifted into the negative range.

This is worrying because international growth was supposed to be the lifeline.

Now, guys, if you look at this, the stock's 5-year performance is down 77%. Hey guys, I don't know if this matters to you, but I'm on Twitter . If you'd like to follow me on EM Paul G., this person wrote: "Urgent, Lululemon stock continues to plummet, and is now down more than 80% from its all-time high in 2023."

What the hell happened to the Lululemon? Can they change their course?

Why does a drop in the share price mean that the company's performance has worsened? Revenues in 2023 amounted to 8.11 billion, and revenues in 2026 amounted to 11.1 billion. Free cash flow in 2023 was 330 million, and in 2026 it was 1.35 billion.

I see revenues rising and free cash flow growing significantly. This doesn't necessarily mean the future is bright, but the same future existed for Lululemon in 2023.

Folks, it's the story that has changed. This is what has changed. I understand that. There's a more complicated story here. The perception in 2023 was that the company would continue to progress.

Just like the current perception that it will fail. Which one is right ? Well, one thing I will tell you is that the stock price hasn't told us anything about this. Because the price prior to 2023 was very low.

You should have owned this company. Right here. In fact, this was in 2021. The peak was here in 2023. This means you should own this company if you are only tracking the stock price. He wouldn't have taken that into account.

International growth could accelerate again. Lululemon has a distinctive and globally recognized brand, but still has significant room to expand outside of North America. This is amazing.

Secondly, the company enjoys an unusually strong economic position. It currently achieves a gross profit margin of approximately 56%. Therefore, for every product they sell, 56% of it is considered profit for them.

This is higher than Nike's, which is about 40%. Net profit margin of 12.8% and return on invested capital of 20%. This is a huge deal for a company.

After that, the assessment already reflects considerable pessimism. This is the key to the matter here. That's why Perry is excited because he looks at her and says, "Hey, wait a minute."

There is a lot of pessimism in this. Has this been exaggerated ?

Many people will sit and say that the brand is damaged, not dead. Good. I mean, listen, it's still a high-quality brand. The people I hear about who have stopped buying , they don't say they think the quality is bad.

What they're saying is, um, I'm kind of fed up with it . They also have a new CEO, who is someone who has been at Nike for a long time, so there are a lot of other advantages as well.

Pessimists also have very valid points , and you should definitely listen to them. The pessimists' first argument is that the brand may lose its momentum. Recent revenue growth is only about 1.7% over the past year, compared to much stronger historical growth .

This is very important. I spoke to women who found " Athleta," they found "Alo," and they found other brands they loved just as much . In fact, my wife says, "Paul, I love the shorts from the Amazon brand."

This is something very important to hear from a woman.

Secondly, margins and inventory may remain under pressure. Clothing retailers are vulnerable to discounts. Now, we talked about a net profit margin of 12.8%, but the 5- year average is 14.5%.

This is evidence that the reductions affect and harm the final profit figures.

Third, international expansion may require greater investment and carries implementation risks. Guys, as they grow internationally, they have to spend that money and make sure they control that market .

This is the source of much potential growth. Sales at their existing stores internationally did not decline to the same extent as in the United States.

Guys, of course they have to keep up with trends. It's clear that people have moved away from the very thing that made them famous, namely leggings. So, let's talk about Perry.

Because his step here is truly remarkable. Lululemon is his largest investment. She has literally been nicknamed "The Deceiver" in my wallet. He had already been watching her for some time.

Months ago, I thought 150 was a great price to buy. So, getting it for less than 100 certainly pleased him.

But here's what makes him so smart. After that bad earnings report, he didn't pretend that everything was fine. He openly admitted that things had gone wrong and lowered his estimate of the company's true value.

But guess what? That's why we have a safety margin.

Again, this is not entirely certain , but we will know soon when it is announced. So think about that for a second . The business performed worse , so its value decreased , but the price fell even further, so the stock actually became more attractive.

This is the essence of thinking about price versus value, and it's the whole game.

And it's not just Perry; some other respected investors such as Tweedy Brown and Fairfax also own Lululemon shares.

Smart money doesn't all agree . One of the large funds, Viking Global, actually bought a huge portion and then sold every single share after only a few months. So even professionals are completely divided.

However, there is an encouraging sign: Lululemon insiders, the people most familiar with the company , bought nearly $2 million worth of shares as the price fell while selling almost nothing .

Even as business deteriorated, Lululemon was aggressively buying back its own shares, about 6 million shares in 8 months, which is more than 5% of the entire company. The problem is that many of these purchases were made at a price between 120 and 150.

But guys , companies like Lulu didn't buy until the price dropped sharply. Now that the stock is below 100, the big question is: Will the new CEO continue to buy at these cheaper prices?

Because that will tell you a lot about how confident management really is.

Here's a controversial angle that Bury also raised. At this low price, Lululemon's total value is only about 10.6 billion, a very small fraction of what it was worth years ago.

The company has 1.4 billion in cash and virtually no debt. This makes it a much easier company for anyone who wants to acquire it completely. A private equity firm or competitor could buy this famous brand and all 825 of its stores for a bargain price.

Because you must believe that if someone came to buy now, they would pay a much higher price than they would today. But, and this is really important, Bury himself said he had no information that anyone was actually trying to buy it .

So, my advice, and it's very rare for me to say this, is don't buy Lululemon just hoping to acquire it. Just know that if you think the business is already a good deal, a potential acquisition would just be a nice bonus.

And now, folks, quickly before we dissect Lulu, a quick reminder: never take our titles and thumbnails literally. We are not here to give advice about stocks. We are here to teach you a process that you can one day apply to your own investments, which will help you sleep better at night and make less emotional decisions.

Guys, when these two things happen, you're likely to get better returns, and that's our goal here: to improve your investment process. Enough talk then. Let's determine the value of this company based on my own assumptions.

And now, folks , I also want to let everyone know that this year's earnings include a one-time tax refund of about 86 cents per share that will not be repeated. Therefore, we just have to exclude that to find the true normal earnings power , which amounts to about $8 per share.

At today's price of around $96, that equates to only 12 times the profit . Here is an additional advantage. The company has approximately $12.50 per share in cash. So, the actual business activity is cheaper than it initially appears.

In general, if you exclude cash, you pay about 10 times the profits for the core business. A really low price for such a well-known brand.

Does she have her own problems ? certainly. But let's take a look at more about the company. Firstly, its current market value is $11 billion. This is the company's price and the value of the enterprise, which is $13.3 billion.

We talked about very little debt, but remember, a lot of that debt is probably leases for their sites, okay? This difference of 11 to 13.3 is the essence of it.

Now, here's what's interesting: their stock has fallen 77% over the past five years, yet their cash flow is above their five-year average. Their cash flow is 1.35 billion compared to 1.09 over the past five years.

Its current price relative to free cash flow is eight . eight. This is unbelievable. High return on capital, more than 20% last year, and 29% for the past five years. The profit margin is lower now, but the 5 and 10 year figures are well above 14% .

Guys, I mean they're not making any acquisitions, $150 million over the last five years, that's nothing.

By the way , members of our community consider it a buying opportunity. Eight pillars, it is an eight-pillared arrow. Low valuation, high cash flow, revenues and net income over the past five years, very little debt, share buybacks and high return on capital.

So, what this tells me is that you should pay attention to this. If this company can change course, and if it can even remain stable, it could be a good investment. Because remember, staying stable while paying eight or nine times your free cash flow is tremendous. This is a huge return on your money.

In a few minutes, we will review the value that I believe Lululemon is worth based on my own assumptions. But before we get to that, let's take a look at the analysts' estimates to see what they think.

Here's what's interesting. Analysts predict a 9% drop in profits, a further 16 % drop, and then a return to growth of 3%, 9%, and 4%. The profit is still $12 per share . But look at this.

They expect growth. Although it is small, they see revenue growth accelerating over time. Therefore, analysts believe there is a better future for Lululemon. If they are right, then this is of great value.

Let's put them all together in our stock analysis tool to find out what this company is worth to us. Okay guys, I've done a 10-year analysis. Now, I'm going to make a slight adjustment to this here.

I will adopt revenue growth rates of 0%, 2.5%, and 5% for the next ten years. I have kept my earnings and free cash flow forecasts low. If you recall, they were achieving 14.5% here.

I put in 10%, 12%, and 14%. Therefore, my average assumptions assume current profit margins and current free cash flow. Therefore, I keep it low.

Next, what is the earnings multiple (EPM) that I will allocate to this business 10 years from now? Well, the average number of companies in the S&P index is 15 or 16. You pay a higher price for good companies, and a lower price for bad companies.

One of the signs that this is a good company is the high return on capital. One of the signs that it's not great is that it's going through difficulties at the moment, and if there's no growth, that's not great .

Therefore, I will assume 12, 15, 17, and 18 in terms of the price-to-earnings (PE) ratio and the price-to- free cash flow ratio 10 years from now. Therefore, I am being cautious here .

I am basically saying that this is a mid-cap company in the S&P index, which I still think is very conservative.

Finally, my return rate is 9.5%. Guys, this isn't the return I'm hoping for . In other words: "Based on my assumptions here, and regardless of the balance sheet, what price should I pay to get a market return of 9% or 10%?"

We have a low price at 105 , a high price at 260, and an average price at 170. This means, based on a conservative average assumption, that the yield is still 18%. Now you can see why members of our community and Michael Perry are interested in this company.

If this had been a random arrow instead of "Lululumon," without headlines, without a boring story, without anyone dictating what you should think, away from the noise of the news, and you had to explore it yourself.

Would you have known how to determine the value of a stock yourself?

So, now, based on my 15% return, I press the Analyze button, and the stock is valued at a low of 76, a high of 180 , and an average of 118. So, it's still at my current level here.

But I'm not going to lie to you guys . One of the problems for me is that I don't know if "Lululimone" fits my investment goals. I don't know if I would be surprised if " Lululumon" disappeared 10 or 20 years from now.

As for "Lululimone, " I would say, "Eh, maybe." I simply stepped back from the road. That won't shock me . Therefore, and for this reason most likely, it doesn't suit my investment portfolio.

Not because of the numbers, but because of my personal financial goals.

So, if you want to see other stocks that Michael Bury is currently buying and betting against, besides Lulu, watch our full Bury analysis next.