Is NIKE Still a Good Investment?

Why You Might Want to “Just Do It” and Buy the Stock

Nike, Inc. (NYSE: NKE), the global athletic footwear and apparel leader, has long been a staple in many investment portfolios. However, as with any investment, analysing the potential benefits and risks of purchasing Nike stock is crucial. This article will investigate whether Nike is a buy, the risks, and a detailed examination of its financial health (cash, debt, share price, and competition). Additionally, we will demonstrate how a fair value for Nike was derived using a systematic approach.

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Financial Health: Cash, Debt, and Share Price

Nike’s FY24 financial performance demonstrates resilience in an economic downturn, maintaining total revenue at $51.4 Billion. The company saw a modest 1% increase in footwear revenue, the largest segment, and a 20% growth in equipment sales. Notably, net income rose by 12% to $5.7 Billion, reflecting improved profitability and operational efficiency. While operating expenses grew by 1%, Nike managed to reduce its cost of sales by 2%, contributing to a 3% increase in gross profit. Overall, Nike demonstrated steady revenue with notable growth in profitability and efficient cost management despite flat revenue growth.

1. Nike maintains a strong balance sheet with significant cash reserves. The latest financial reports show that Nike had over $11 billion in cash and cash equivalents. This liquidity allows the company to invest in growth opportunities, weather economic downturns, and return value to shareholders through dividends and share buybacks.
2. Nike’s debt levels are manageable, with a debt-to-asset ratio of just 0.31, which is lower than the industry norm. The company’s strong cash flow generation enables it to service its debt comfortably. As of the most recent data, Nike’s total debt is around $11 billion, covered by their cash.
3. With a current share price of $72.56, Nike’s share price has fallen significantly by 60% from its all-time high of $179.10 in 2021, indicating poor performance over the last five years. The drop in Nike’s share price might signal that the market previously overestimated its value. Investors should evaluate if the stock is undervalued and if buying at this price makes financial sense. Currently, Nike’s stock trades at around 20 price-to-earnings (P/E) ratio in line with the average on the stock market.

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Competition

Nike operates in a highly competitive industry with major players like Adidas, Under Armour, and Puma. Each competitor brings its unique strengths and challenges. Nike’s ability to maintain its leadership position depends on its continuous innovation, marketing prowess, and ability to adapt to changing consumer preferences. While a dominant force in the athletic apparel and footwear industry, Nike faces increasing competition from established and emerging brands such as ON Athletics and Lululemon.

• The Upstart Challenger: ON Athletics, a Swiss-based company, has rapidly gained traction in the running shoe market. This has earned them an investment from Roger Federer, the retired professional tennis player. Their focus on innovative technology and performance-driven products has challenged Nike’s dominance in this category. Federer left Nike in 2018 to join ON Athletics in 2019, representing a significant landscape shift. ON’s lightweight and responsive footwear has resonated with runners seeking cutting-edge performance. While they have a smaller market share than Nike, their growth trajectory and product differentiation pose a significant threat.
• The Athleisure Powerhouse: Lululemon has successfully positioned itself as a premium athleisure brand, catering to a more affluent consumer base. While its primary focus is on apparel, its expansion into footwear and menswear has brought it into direct competition with Nike. Lululemon’s strong brand identity, emphasis on comfort, and loyal customer base make it a formidable competitor. Nike, on the other hand, is now playing catch-up, adapting its product line to include more lifestyle-oriented apparel, attempting to compete directly with Lulemon in this space.

Reasons to Buy Nike

1. Strong Brand and Market Position: Nike is one of the world’s most recognised and valuable brands. Its strong brand loyalty and innovative product lines keep it at the forefront of the athletic wear industry.
2. Global Expansion: Nike continues to expand its presence in emerging markets, leveraging its brand to capture a growing customer base in countries like China and India.
3. E-commerce Growth: Nike’s direct-to-consumer (DTC) sales, particularly through its e-commerce platform, have grown rapidly, offering higher margins than traditional retail channels.

Risks

1. Economic Conditions: Nike’s performance is closely tied to global economic conditions. Economic downturns can reduce consumer spending on discretionary items, including athletic footwear and apparel.
2. Currency Fluctuations: Nike is exposed to currency risks as a global company. Changes in exchange rates can impact the company’s revenues and profitability.
3. Supply Chain Disruptions: Nike’s reliance on global supply chains means that any disruptions, such as those caused by political instability, natural disasters, or pandemics, can affect its ability to deliver products.
4. Intense Competition: The athletic wear industry is highly competitive, with major players and new entrants constantly vying for market share. Nike must continuously innovate to stay ahead.

Fair Value Calculation

The Fair Value Calculator from Stock Finance Pro analysed critical financial metrics, including revenue growth, profit margins, assets, liabilities, and future cashflows, to derive a default value of $66 per share. The current trading price of around $72 suggests that Nike is slightly overvalued by 11% but offers a potential buying opportunity for long-term investors. Below are the assumptions used to derive the fair value:

• Nike’s revenue has grown at an average annual rate of about 6% over the past five years. Given the economic uncertainties and competition, the fair value assumes a slow growth rate of 3–5% for the next five years.
• A discount rate, sometimes called weighted average cost of capital (WACC) of 10%.
• A growth decline rate of 1%, indicating that the revenue growth will slow down yearly, giving NIKE a revenue of $55 Billion to $59 Billion by 2029.
• No share buyback was factored into the analysis, even though in June 2022, the Board of Directors authorised a new four-year, $18 Billion program to buy back shares of NIKE’s Class B common stock.

Conclusion

Nike remains a strong investment option for those seeking exposure to the athletic wear industry. Its robust brand, continuous innovation, and strong financial health make it a compelling choice. However, investors should be mindful of the economic conditions, currency fluctuations, supply chain risks, and intense competition that could impact its performance.

As the athletic apparel and footwear market continues to evolve, Nike no longer has the MOAT it once had. It must navigate these competitive pressures while maintaining its market leadership position.

Using a systematic approach to determine its fair value, Nike appears slightly overvalued at its current share price. As always, investors should conduct their due diligence and consider their risk tolerance before making investment decisions.