Even with a stock price that has soared nearly 600% over the past five years, you might think Lululemon's (LULU -0.98%) days of market outperformance are over. I'm here to tell you that you're likely wrong with that assumption, as the athletic apparel maker still has a sizable market opportunity ahead of it. And what may seem like a steep valuation at first is actually not too bad given the company's trajectory. 

Here's why Lululemon's stock could be headed higher. 

Person running up the stairs.

Image source: Getty Images.

Barely scratching the surface 

Lululemon's trailing 12-month sales totaled $5.5 billion, which accounts for approximately 3.2% of the global sports and fitness clothing market. It's obvious that the business is still just a tiny fraction of the overall industry, a fact that can be easily forgotten thanks to Lululemon's rapid growth. In the most recent quarter, sales and operating profit jumped 61% and 134%, respectively, compared to the second quarter of 2020. 

What started as a business selling yoga pants to women has evolved into a complete lifestyle brand for everyone. In fact, Lululemon's men's segment is thriving. Over the past two years, men's revenue increased 31% annually, more than the 28% growth rate for women's. "We will double our men's business this year," CEO Calvin McDonald said on the Q2 earnings call. This goal was set in 2019 to be reached in 2023, so achieving an ambitious target an incredible two years ahead of schedule speaks to Lululemon's strong consumer relevance. 

And since we're talking about the brand, the most recent Taking Stock With Teens survey conducted by Piper Sandler provides some important data about the apparel market. Out of 10,000 teens surveyed in 44 states, the No. 1 clothing brand identified, by a wide margin, was Nike (NKE 0.45%). Lululemon came in fifth place with just 5% of teens choosing it as their top clothing brand. I point this out because it highlights the untapped opportunity Lululemon has when it comes to younger customers. The company has already achieved remarkable success, but it hasn't even pursued a direct strategy aimed at boosting sales from teens. This could be a big growth driver in the future. 

Person sitting on floor and stretching.

Image source: Getty Images.

With 86% of sales in fiscal 2020 coming from North America, Lululemon also has huge potential for international expansion. Of the 45 to 55 new store openings planned this fiscal year, the majority (35 to 40) of them will be in foreign countries. International revenue is up 43% annually on a two-year basis. "What's very exciting is the balance of growth across all international markets, meaning they are all contributing significant growth and into our goal of quadrupling our international business by '23," McDonald mentioned in response to an analyst's question during the conference call. 

Expanding beyond the women's category and outside the U.S. are substantial strategic priorities for Lululemon. Therefore, it's not hard to see the outstanding potential this business still has in front of it. 

What about the valuation? 

Although Lululemon's stock has surged in recent years, it's meaningfully lagged the broader S&P 500's performance over the past 12 months. Even so, investors might hesitate to buy shares today because of the company's forward price-to-earnings (P/E) ratio of 53, which is even higher than Nike's 43. 

But consider that over the past five years, Lululemon has increased quarterly revenue 182% and quarterly profit 288%. Nike, on the other hand, has boosted these same metrics 35% and 50% during the same time period. And adding to Lululemon's bull case is the fact that Wall Street's consensus earnings forecasts for the next two fiscal years have consistently been raised over the past three months, while Nike's have fallen. So, Lululemon is able to surprise the market to the upside by beating expectations, which only helps to push up the stock price. 

Lululemon is an outstanding company whose valuation is easily justified given the remarkable growth of the past and the bright prospects for the future. This is good news for both current and soon-to-be shareholders, as the stock is likely headed higher.