Super Bowl LI will unarguably go down as the greatest championship game in the NFL’s storied history. Down by 25 points late in the third quarter, things looked awfully grim for the New England Patriots. Their opponent, the Atlanta Falcons, simply looked younger, faster and hungrier, yet the Patriots dug deep. With a few lucky breaks, and an improbable comeback rally, the Patriots took home their fifth world title. Somewhere out there, the executives of Under Armour Inc (NYSE:UA, NYSE:UAA) took notes.
It’s not just for the fact that Patriots quarterback Tom Brady is under their sponsorship payroll, although it definitely helps.
With the victory, Brady has five Lombardi trophies to his name — a first for a starting quarterback. Before the Super Bowl, Brady had already established himself as the best the game has ever produced. Now, there is no question. He’s the “GOAT” — the greatest of all time. The question for Under Armour investors is will that matter for UA stock?
In short, no. The Patriots showed a lot of heart and a lot of guts. Undoubtedly, this game will be referenced indefinitely by life coaches and “rah rah” corporate seminars. It was the movie Rudy but in real time. Unfortunately, none of the lessons of Super Bowl LI are applicable to Under Armour. The markets don’t care about heart — they care about performance. And that’s exactly where UA stock falls short.
UA Stock Bit Off More Than It Could Chew
As things stand now, UAA is down nearly 28% year-to-date. That’s the kind of horrific pain that was years in the making, and may take years to resolve. The common mistake is to assume that something just didn’t go right for UA stock. But the signs were evident if you cared to look.
Back in the spring of 2016, I was worried about the ability of UAA to hang with the established names in the business, Nike Inc (NYSE:NKE) and Adidas AG (ADR) (OTCMKTS:ADDYY). Under Armour was pushing an aggressive campaign for world dominance. They signed on big names like Brady. They also made significant inroads into that other football — the English Premiere League.
This was all wonderful except that sports sponsorships were getting way out of hand. If Adidas had to monitor its spending so as to not get out control, how much more so should UAA? When you pull up the fundamentals for UA stock, and compare them to the big boys, it’s not even close. They have significantly more leverage than Under Armour. It’s sort of like Groupon Inc (NASDAQ:GRPN) challenging Amazon.com, Inc. (NASDAQ:AMZN) in the e-commerce sphere.
This is one of the reasons why the bankruptcy of Sports Authority hurts so much for UA stock. Sure, the sting goes around the board. However, UAA has substantially fewer resources to buffer the body blows. They needed Sports Authority. That much is evident when you look at Under Armour’s revenue growth. Sales are growing, yes, but at a decimated rate. With the apparel maker putting so much on the line with endorsement deals, UA stock needs phenomenal numbers. Instead, they put up an “okay” performance.
UAA Has Massive Challenges Ahead
Sorry folks, but UAA is a growth stock. That’s the reason why people took a chance on it. If we know anything about Wall Street, it’s that you have to give them what they want. Transitioning from one category to another without a solid reason just won’t fly. And if that transition is forced due to the loss of a critical business partner, you can bet that professional traders will take a dim view on the matter.
InvestorPlace contributor Richard Saintvilus also raised a great point about indirect challenges facing UA stock. Several department stores have been under pressure recently, including higher-end retailer Macy’s Inc (NYSE:M). That’s a serious worry, considering that they cater to a wealthier clientele, and that they also carry Under Armour apparel. Whether we want to admit it, there’s something going on with the American consumer. UA has to quickly lick its wounds and get its head back in the game.
But then there’s that awful 23% loss incurred at the end of last month. The volume, 57 million shares, was also telling. Simply put, UAA is in a technical no-man’s-land. The sentiment is completely bearish at this point in light of having virtually zero support. Right now, I’m more concerned that UA stock could fall to $12 before things start to get better.
That’s not a price forecast for UAA. Rather, it’s a way for me to say that reality may have sunk in for Under Armour. The company ran a naked bootleg play, hoping for a dramatic score. But the defense knew exactly what they were doing. The end result is what you see right now.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
