LULU

Can This Unstoppable Stock Outperform the "Magnificent Seven" in the Next 5 Years?

Anyone who even remotely observes the economy or the stock market has likely heard of the so-called "Magnificent Seven." These industry-leading tech enterprises dominate their end markets, and they have historically made for tremendous investments.

But given their massive market caps, investors might be turned off from wanting to buy them, assuming that they don't possess a lot of upside from this point forward. Luckily, there are other, more under-the-radar, businesses that should be on your watch list.

Can this unstoppable stock outperform the "Magnificent Seven" in the next five years? Let's take a closer look.

Growing in a profitable manner

The company I'm talking about increased its revenue at an annualized pace of 24.1% in the last five years. Even more impressively, its adjusted operating income soared at a compound annual rate of 26.2% during the same time. I'm talking about Lululemon Athletica (NASDAQ: LULU).

This premium athletic clothing brand continues to dominate the industry, with strong growth and profitability becoming a normal occurrence these days. Lululemon's remarkable financial performance over the past few years -- during a stretch that included the pandemic, supply chain bottlenecks, rising interest rates, and general macro uncertainty -- demonstrates just how resilient this business is. That makes it even more high-quality.

There's no reason to believe the gains won't continue in the years ahead. The executive team hopes to post $12.5 billion in revenue in fiscal 2026, double what it reported in fiscal 2021. Boosting digital, men's, and international sales is a focal point.

It's easy to be optimistic about the company's prospects. Lululemon has been able to stand out in a competitive industry because of its strong brand presence, which is the source of its economic moat. You can argue that the clothes are better quality than other retailers, but the brand is what entices people to pay expensive prices.

In the most recent quarter, Lululemon's gross margin came in at 57%, a clear sign of its pricing power. That's better than larger rival Nike. I think it helps that Lululemon doesn't rely on third-party wholesale accounts to move its merchandise. Instead, it uses its global network of 686 company-owned stores, as well as its website, to reach shoppers. This protects the brand and the margins.

Looking at the future

Massive scale, unlimited financial resources, and top tech talent are just some of the numerous competitive advantages that the "Magnificent Seven" benefit from. These traits will undoubtedly make it difficult for any new upstart to dethrone them.

However, the industries they operate in, like consumer electronics, streaming services, digital advertising, electric vehicles, e-commerce, semiconductors, and cloud computing, are prone to much more technological change and regulatory uncertainty than Lululemon is.

Compared to the "Magnificent Seven," it's not a bold statement when I say that Lululemon invites much less innovation, disruption, and capital from new entrants. This helps raise its durability, lowering the chances the company will get derailed by competitive forces.

However, finding lasting success in in the fashion industry is the exception to the rule. This just means that Lululemon's management must prioritize maintaining the brand's image above all else to ensure long-term financial performance. So far, the trends are extremely encouraging.

Given its much smaller size and still significant growth runway, I wouldn't be surprised at all if between now and 2029, Lululemon stock outperformed a basket of the "Magnificent Seven" businesses. Perhaps this is all the convincing you need to add the premium apparel brand to your portfolio.

Should you invest $1,000 in Lululemon Athletica right now?

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica and Nike. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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