Should I Buy Under Armour Inc (UAA) Stock? 3 Pros, 3 Cons

The growth rate for UAA stock is decelerating, but there's more to the story

Under Armour Inc (NYSE:UAA) probably won’t be an MVP for investors this year. So far, the shares are off close to 20%. Yet this actually masks fairly extreme volatility. The fact is that the company has suffered a variety of big drops, with the latest coming in late October when UAA stock fell 12%.

Should I Buy Under Armour Inc (UAA) Stock? 3 Pros, 3 Cons

So what’s the problem? Of course, the growth rate at Under Armour is decelerating. And this is always rough for high-multiple stocks.

During the latest quarter, the company posted a 22% increase in revenues. And while this is pretty good for most companies, it was definitely well short of Wall Street expectations. In fact, during the earnings call, UAA indicated that the fourth quarter will be soft, too.

To get to the bottom of whether UAA stock is a value or a risk, let’s take a look at three pros and three cons.

UAA Stock Pros

Culture of Growth: Under Armour is a powerful example of the great American entrepreneurial spirit. The founder and CEO, Kevin Plank, got the idea for the company because he fashioned himself the “sweatiest guy on the football field.” He developed athletic apparel to solve the problem and the rest is history. Since then, Under Armour has become of the world’s most impressive growth stories, hitting a stride of 20%-plus revenue gains for 26 consecutive months.

Yet Plank has been adept at entering new markets. For example, his efforts in footwear have resulted in footwear revenues spiking from $239 million in 2012 to nearly $1 billion this year. Then there is the success in foreign markets, where revenues have jumped from $108 million to $700 million during the same period.

Market Opportunities: Let’s face it, the deceleration in growth for Under Armour should not be a surprise. As the revenue base scales, it certainly gets tougher to keep up the pace. Even Nike Inc (NYSE:NKE) had similar problems in its early phases. Despite all this, there is still much runway left for Under Armour. Athletic wear is also a category that has continued to maintain premium pricing so long as there is innovation. No doubt, this is something that is a key part of the DNA for Under Armour.

Connected Fitness: Over the past few years, UAA has been making substantial investments in digital technologies with a string of acquisitions. While the results are still far from clear cut, the strategy is spot-on. With the ubiquity of smartphones, it only seems natural that consumers will want to use them for their athletic activities. Actually, even if UAA has troubles with monetizing the digital technologies, there should still be major benefits. They include: having a strong relationship with customers, providing more personalization for e-commerce transactions and learning from predictive analytics.

So far, UAA has a user base of about 190 million, which is certainly impressive. But the company has also implemented a sophisticated back-end system, which is based SAP SE (ADR) (NYSE:SAP) software.

UAA Stock Cons

Competition: Of course, the biggest rival is the mighty NKE. Even though it is over 50 years old, Nike’s brand resonates with consumers across the world. The company also has continued to innovate as well as strike savvy marketing deals. But Under Armour now has to worry about another big player, adidas AG (ADR) (OTCMKTS:ADDYY). Not long ago, Adidas appeared headed for oblivion, but now company has gotten its mojo back. Consider that Adidas has recently retaken the No. 2 spot in market share for footwear and apparel in the U.S.

According to Jefferies analyst Randal Konik: “Over the past few years, we believe (Under Armour)’s stellar growth in men’s apparel and growing presence in footwear has come at the expense of shelf space for Adidas, especially since Nike has remained strong. Now with Adidas starting to come back, we think UA (where expectations are high) could see downside risk.”

Marketing Costs: These have skyrocketed over the years for UAA. Endorsement deals not only have hefty price tags, but usually involve long-term commitments. The result is that there is more pressure on margins. Consider that Stifel analyst Jim Duffy believes that the costs for endorsements will spike by 40% a year for the next five years! Because of this, Duffy recently dropped his price target on UAA stock from $33 to $28. Something else: Endorsements deal can certainly be dicey. Hey, just look at NKE’s experience with athletes like Tiger Woods.

Valuation: UAA stock is far from cheap. Keep in mind that the price-to-earnings ratio is at about 37X. This is certainly a high premium when compared to the growth rate, which is expected to be about 25% or so. And there is also no dividend payout. Although, if the top-line comes under more pressure — which is definitely reasonable — the bearishness with the stock could be far from over. As already seen in the latest quarter, investors are already antsy. What’s more, UA is expensive when compared to its peers. For example, NKE currently trades at about 23 times earnings.

Bottom Line on UAA stock

Again, UAA has been an amazing success story. Who would have thought that — back in the 1990s — a startup could take on giants like Nike and Adidas?

I’m sure Plank had to deal with lots of skepticism.

But for investors, what really matters is the future. And yes, there are certainly many risk factors. The competitive environment is getting more intense and the costs of marketing will likely be a drag on margins.

Interestingly enough, several of the endorsement deals could easily underperform. In fact, there are early signs of this regarding the deal with basketball star, Stephen Curry. It appears that his sneakers, which are called 3.0, are lagging at retailers like Foot Locker, Inc. (NYSE:FL).

So should you buy UAA stock right now? Well, probably not. Whenever a hyper-growth company loses its momentum, the bear move is usually not temporary.

Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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