This Monster Stock Gained 2,390% Over the Last 5 Years, Crushing Each of the "Magnificent Seven" and Palantir. It Has Nothing to Do With Artificial Intelligence (AI), and It's Still Dirt Cheap!

Key Points

• Artificial intelligence (AI) has represented a generational catalyst for the stock market in recent years, particularly in the technology sector.

• Prior to AI entering the spotlight, many of today's favorite tech stocks were viewed as speculative or "boring" blue chips whose best days were in the rearview mirror.

• In the background, a once-struggling retailer turned around its operation and won the hearts of new customers ... and investors.

• 10 stocks we like better than Build-A-Bear Workshop ›

Over the last few years, no theme has captured Wall Street's imagination quite like artificial intelligence (AI). Since AI burst into the mainstream in late 2022, investors have watched several companies climb into the trillion-dollar club. Chief among them is semiconductor giant Nvidia -- whose market value has surged more than twelvefold, making it the most valuable company in the world.

Beyond Nvidia, the so-called "Magnificent Seven" megacap tech titans have also thrived amid the AI revolution. And let's not forget about Palantir Technologies -- the data mining specialist that has quickly evolved from an elusive government contractor into a core operating system for Fortune 500 companies and military agencies alike.

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AI has served as a once-in-a-generation catalyst for the tech sector. But not too long ago, many of these companies were dismissed as either speculative bets with limited use cases or mundane blue chips unlikely to deliver outsized gains.

Image source: Getty Images.

Meanwhile, operating far from the AI spotlight was specialty retailer Build-A-Bear Workshop (NYSE: BBW) -- whose eye-popping 2,390% gain over the last five years has made it one of the best investment choices in the market, even more so than big tech.

BBW data by YCharts

This leads to an obvious question: How in the world did this happen?

While Build-a-Bear may not be found in splashy AI headlines, its stock has quietly become a monster. The best part? Despite its staggering returns, there's a compelling case that the stock remains dirt cheap and further gains are on the horizon.

A workshop that needed some repairs

The last several years have featured a number of headwinds that seemed almost insurmountable for Build-a-Bear. Consumer shopping patterns have been shifting online for years, with the so-called "Amazon Effect" blistering traditional brick-and-mortar retailers.

Moreover, rising inflation and elevated borrowing costs have weighed heavily on consumer purchasing power. For many households, discretionary purchases are the first things that get cut. That spelled even more risk for Build-a-Bear, whose core business of selling custom plush toys is far from an essential service.

US Inflation Rate data by YCharts

So, how did Build-a-Bear actually reinvent itself against all odds?

Build-a-Bear's turnaround should be studied in business schools

While brick-and-mortar has faced relentless challenges in recent years, it's worth noting that other adjacent forms of retail have faced pressure, too. Theme parks, cruise lines, and movie theaters were some of the hardest hit by the aftermath of the COVID-19 pandemic and broader economic slowdown.

Recognizing this shift, Build-a-Bear leaned into a new strategy: Transforming its stores from traditional shops into experiential retail destinations. For families unable to justify a high-cost vacation, Build-a-Bear offered a compelling alternative -- an immersive, memory-making experience at a fraction of the price. This pivot was the first step in the company's impressive turnaround.

Once Build-a-Bear proved its in-store experiences were worth the time and money, it doubled down by forging a series of strategic licensing partnerships. Deals with Walt Disney, Pokémon, and even the NFL dramatically expanded the company's intellectual property (IP) portfolio beyond generic plush animals. Moreover, these partnerships didn't just bring new characters to Build-a-Bear, they unlocked entirely new customer demographics.

Today, Build-a-Bear is no longer just a storefront for kids. It has evolved into a destination that appeals to multiple generations -- from nostalgic adults to fans of the booming collectibles market.

By blending experiences with exclusive IP, Build-a-Bear has unlocked key ways to stay relevant. Furthermore, the company's expanding portfolio fuels repeat business as fans return for each new character release -- turning casual visits into loyal, recurring traffic.

Why Build-a-Bear stock still looks dirt cheap

Build-a-Bear's operational turnaround has translated into accelerating revenue, widening gross profit margins (EPS), and robust earnings growth -- all now hovering near five-year highs.

BBW Revenue (TTM) data by YCharts

Yet despite this strong execution, Build-a-Bear stock still looks dirt cheap.

Even after delivering a near-2,400% return, shares trade at a modest price-to-earnings (P/E) and forward P/E multiple of 15 and 18, respectively. For context, the average P/E ratio and forward P/E across the S&P 500 sits at 26 and 23, respectively.

This valuation gap suggests investors believe they'll capture more upside in the broader market than in Build-a-Bear. But here's the catch: Much of the S&P's froth is concentrated among big tech -- the very names Build-a-Bear has consistently outperformed.

Few companies can stage a turnaround of this magnitude while simultaneously accelerating both revenue and earnings. Build-a-Bear is doing all three, yet trades at a steep discount to the market.

In my eyes, the company's evolution is far from over and further gains are in store. At today's price point, Build-a-Bear looks like a compelling buy -- and one investors should consider scooping up hand over fist.

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Adam Spatacco has positions in Alphabet, Amazon, Apple, Meta Platforms, Nvidia, Palantir Technologies, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Nvidia, Palantir Technologies, Tesla, and Walt Disney. The Motley Fool recommends Build-A-Bear Workshop. The Motley Fool has a disclosure policy.