At first glance, Lululemon (LULU 0.34%) and Figs (FIGS -2.43%) might not have a lot in common. Lululemon sells high-end yoga apparel and activewear. Figs is a much smaller online retailer that specializes in fitted scrubs and other medical apparel for healthcare workers.

But when Figs went public last May, many analysts highlighted its similarities with Lululemon. Like Lululemon, Figs focused on a niche market that had been overlooked by larger apparel retailers. Both companies also initially targeted affluent female shoppers, and their sales were rising at high double-digit rates in an industry known for its anemic growth.

A yoga instructor doing vrikshasana on a mat.

Image source: Getty Images.

The prospect of finding the "next Lululemon" was tantalizing, since the yoga apparel maker's stock had delivered a whopping 1,555% return since its IPO in 2007. But after a promising start last year, Figs' stock now trades more than 60% below its IPO price of $22. But if you ignore that past performance and reset expectations for both stocks, which one would actually have the better chance of delivering a five-bagger return over the long term? The established activewear leader with a market cap of $38 billion, or the disruptive healthcare apparel maker that is only worth $1.4 billion?

Lululemon's possible path toward a 5x gain

Back in April 2019, Lululemon launched a "Power of Three" plan aimed at doubling its digital revenue, doubling its men's revenue, and quadrupling its international revenue (relative to fiscal 2018, which ended in February 2019) by fiscal 2023. It cleared its digital and men's targets ahead of schedule in fiscal 2021, even as the pandemic disrupted its brick-and-mortar business, and it will likely quadruple its international revenue by the end of fiscal 2022.

Those accomplishments prompted Lululemon to introduce a new "Power of Three x2" growth plan this April. Once again, it plans to double its digital and men's revenues, as well as quadruple its international revenue, from fiscal 2021 to fiscal 2026. It believes that strategy will nearly double its annual revenue to $12.5 billion by the final year. So assuming that its profits and valuations hold steady, its stock might double in four years.

However, achieving a five-bagger gain would take a lot more time. To achieve its new five-year target, it needs to increase its annual revenue at a compound annual growth rate (CAGR) of 15% between fiscal 2021 and 2026, compared to its CAGR of 22% between fiscal 2016 and 2021. Therefore, Lululemon's own guidance indicates its growth is gradually cooling off.

But to increase its annual revenue fivefold from fiscal 2021 to $31.3 billion by 2031, it would need to grow its top line at a CAGR of at least 17% through the final year. So unless its growth significantly accelerates or it makes some unexpected acquisitions, it could take more than a decade for Lululemon's stock to soar another 400%.

Figs' possible path toward a 5x gain

Figs' business was well insulated from the pandemic because it sells all of its products online. Most of its competitors across the fragmented medical garment market still sell their products through brick-and-mortar stores. Figs' digital sales and form-fitting designs made it a popular choice for healthcare workers who were fed up with older and ill-fitting products.

As a result, Figs' revenue surged 138% to $263 million in 2020 and rose 59% to $420 million in 2021. Its total number of customers more than doubled to 1.3 million in 2020, then grew 46% to 1.9 million in 2021.

However, Figs' growth decelerated significantly over the past year. It ended the second quarter of 2022 with just 2 million customers, and it expects its revenue to only grow 22%-26% for the full year. That slowdown is worrisome, because it suggests its growth could peak soon as it saturates its niche market of higher-end medical apparel.

In its IPO filing, Figs cited estimates from a Frost & Sullivan study that claimed the total addressable market of the U.S. healthcare apparel industry would grow at a CAGR of 6.1% between 2020 and 2025.

Figs has been growing faster than the broader industry, but analysts only expect its revenue to grow at a CAGR of 23% from 2021 to 2024. If it hits that target and grows at a more modest CAGR of 20% from 2024 to 2031, it could generate about $2.8 billion in revenue by the final year -- which would be more than five times higher than its estimated revenue for 2022.

Therefore, Figs arguably has a better shot at generating a five-bagger gain before Lululemon over the next 10 years, but there's no guarantee it can actually scale its business up to those billion-dollar levels. Other companies, including Lululemon, could also eventually launch similar sub-brands to tap into the growth of its fitted healthcare apparel market.

Lululemon is still a more stable investment

Figs could grow faster than Lululemon over the next decade. However, Lululemon remains a better all-around investment than Figs, which has yet to prove that it can continue to grow for years without saturating its own market. At 27 times forward earnings, Lululemon also seems cheaper than Figs, which has a much higher forward price-to-earnings ratio of 37. Therefore, Figs is clearly still a higher-risk, higher-reward play than Lululemon.