Nike’s stock (NYSE: NKE), a company designing, developing, and marketing footwear, apparel, equipment, and accessory products, has gained roughly 28% in the last year – increasing from about $128 to around $164 currently, underperforming the S&P500, which grew 34%. Why? In the recent fiscal first quarter, the company lowered its full-year guidance due to supply chain issues that hit its factories in Vietnam and Indonesia. Covid related shutdowns also resulted in Nike losing weeks of production since July, while rail and port congestion lengthened lead times for goods to arrive in North America and the EMEA regions. However, these issues appear to be short-term in nature and should likely not impact the long-term growth of the company. That said, the company is showing plenty of opportunities to keep expanding going forward. We discuss more in the sections below.
But is this all there is to the story?
No, not quite. Despite the company’s stock rally, Trefis estimates Nike’s Valuation at about $171 per share, 4% higher than the current market price based on two key opportunities.
The first opportunity we see is Nike’s Revenue growth. The company’s revenue rose 16% year-over-year (y-o-y) in the first quarter to $12.2 billion. The gains were fueled by strong demand, particularly in its direct and digital channels, where sales were up 28% and 29%, respectively. In fact, the company saw digital sales jump even as sales in physical stores recovered from the pandemic. That said, the direct-to-consumer channel tends to offer higher gross margins and gives the company more control over the sales process. Consequently, the company’s overall margins grew by 1.7 percentage points to 46.5%, which contributed to a 22% growth in its earnings per share to $1.16 in Q1. Overall, Nike also noted that more than 65% of its total sales came at full price, exceeding the company’s own target. By the look of things, the company appears to be on track to hit its goal of generating 40% of its revenue from owned digital sales by 2025.
As supply chain constraints remain, Nike is expecting markdowns to be lower than normal for the rest of fiscal 2022. The company is even planning on raising prices in the low single-digits in the second half of the year to account for some of the increased costs in the supply chain.
The second key opportunity stems from Nike’s valuation multiple compared to its peers. The stock now trades at a premium of 48x its projected 2022 earnings per share of about $3.59, per Trefis estimates. This is higher when compared to its peer, Skechers, trading at 18x forward earnings. And, we believe that NKE deserves this premium in its multiple. While Nike’s revenues saw a 7% CAGR in the last three years (fiscal 2018 and 2021), SKX’s revenues grew at a CAGR of 4% during the same period. In addition, Nike’s earnings grew 45% during this period, whereas Skecher’s earnings declined 17%. Having said that, we also expect Nike’s revenues to grow at a strong rate of 20% over the next two years, compared to a 7% growth expected for SKX’s revenues.
Our price estimate of $171 for Nike stems from a 47.8x P/E multiple and $3.59 in earnings per share in fiscal 2022. This implies around a 4% premium to the current market price near $164.
For further comparison among peer groups, it is helpful to see how they stack up. NKE Stock Comparison With Peers shows how Nike compares against peers on metrics that matter. There are also several stocks in S&P500 that look like a Better Bet Than NKE stock.
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