What happened
On a rough day for tech stocks (the Nasdaq Composite dropped 2%) that left large-cap stocks mostly unscathed (the Dow Jones Industrial Average ended flat), shoemaking behemoth and consummate blue chip stock Nike (NYSE: NKE) nonetheless found a way to end the day lower.
By the time the closing bell rang, Nike stock had lost 4.1%.
Image source: Getty Images.
So what
What's to blame for tripping up Nike stock? A note from an analyst at Swiss megabank UBS.
The analyst cut his price target on Nike stock by nearly $20 a share this morning, to $173. Nike is set to report its fiscal third-quarter 2022 numbers next week, after close of trading on March 21. The analyst, however, warns that the news might disappoint -- and the guidance might not be good, either.
As The Fly reports, the analyst thinks "Nike's China business is not recovering as fast as the market expected," with "supply chain challenges, temporary store closures in Russia, higher oil prices, and a rising U.S. dollar" all working against the stock. Accordingly, he predicts that any Q4 guidance that Nike gives will be of the downbeat variety.
Now what
How might investors react to that (assuming, of course, that the prediction is right)?
Well, consider: Right now, analysts are forecasting $0.71 per share in earnings for Nike in fiscal Q3. That would already be a 21% year-over-year decline from fiscal Q3 2021. Wall Street analysts have been telling investors, though, that things will perk up in fiscal Q4, with Nike earning perhaps $0.97 per share, a 4% bounce higher from last year, which investors might be willing to wait around for.
If Nike instead both reports declining earnings in Q3 and promises even more declines in Q4, these declines are going to start to look like a trend -- and a trend going in the wrong direction. With Nike stock currently trading near $118 per share, and valued at a pricey 24.5 times forecast earnings, investors probably won't be in a forgiving mood if they find out next week that Nike's earnings are shrinking instead of growing.
In other words, if UBS is right about this ... then investors were probably right to sell today.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns and recommends Nike. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
