InvestorPlace Assistant Editor John Kilhefner recently asked whether Under Armour Inc (NYSE:UA, NYSE:UAA) is a dog or a bargain. I suppose the answer depends upon what kind of dog we’re talking about. I prefer golden retrievers. They’re cute and they’re useful. Only one of those attributes matches UAA stock, and it’s not useful.
Although Under Armour stock jumped on Thursday after the company reported relatively positive earnings results (at least compared to what Wall Street was expecting), things still aren’t all clean and shiny for the stock.
As InvestorPlace contributor Vince Martin reported, “Under Armour’s problems aren’t solved” despite the fact that it grew revenues by 7% and beat Wall Street’s expectation of a 4-cent loss by marking down a net per-share loss of only 1-cent. As Martin asserts, “an all-out rebound remains a few quarters off.”
The narrative shift for UAA stock post earnings is that the company is not completely doomed, but I still retain some of my past critiques of the stock. If had to go with only one argument against it, it’s that Under Armour lacks the long-lasting firepower to take on the industry giants.
Their names are Nike Inc (NYSE:NKE) and adidas AG (ADR) (OTCMKTS:ADDYY). No matter what UAA does, Nike and adidas can do bigger and better. Indeed, adidas is so much of a “baller” that it doesn’t need to capitalize its own name.
Under Armour stock has certainly acquired street cred with their avant-garde styling and popular products. The sports apparel maker also performed a coup d’etat with their Tom Brady sponsorship. Even with various team loyalties in mind, Brady is regarded as the greatest quarterback ever. To its credit, the company has exploited this relationship shamelessly.
But financial markets don’t respond to street cred. Wall Street doesn’t care if you think Nike and adidas are too “corporate.” The bottom line is the bottom line — this is where Under Armour stock is starting to disappoint.
For fiscal year 2016, UAA tallied up $257 million in net income, a mere 10.3% increase over 2015’s results. The company almost fell into single-digit growth. That would have been psychologically disastrous for Under Armour stock, which averages 27.5% in net income growth since 2009.
Positive Developments for UAA Stock?
With that said, some optimistic indicators are on the horizon. Along with the easing tensions from the decent earnings report, trading blipped higher earlier this month thanks to Under Armour’s distribution deals with Kohl’s Corporation (NYSE:KSS) and DSW Inc. (NYSE:DSW). Along with the obvious sales figures, retail is all about marketing and attracting consumer traffic.
When I worked as a senior business analyst for Sony Corp (ADR) (NYSE:SNE), we spent considerable time on product placement. Everything down to the size of the packaging to the height level of the products was a meticulous science. From a purely business perspective, I can appreciate what Under Armour is doing here.
Long-term shareholders (what few are remaining) of UAA stock can also appreciate the effort. While no real joy exists for an investment that has lost nearly 25% year-to-date, the hemorrhaging has subsided. Since the close of Mar. 23, Under Armour stock has gained nearly 13%. Is that a complete victory? No, but it’s a start in the right direction. You can’t move forward until you stop moving backward.
Finally, UAA stock is buoyed by the growth argument, for lack of a better phrase. Nike and adidas are both in the maturity phase of their business. They can expect steady, single-digit growth. On the other hand, Under Armour stock is the underdog. As Mr. Kilhefner puts it, “Under Armour has more markets to grow. Nike has pretty much already conquered the world.”
Don’t Buy the Under Armour Stock Hype
So should investors give Under Armour stock a second chance? No, absolutely not! For starters, this is not a second chance — this is more like the third or fourth chance. Most critically, however, the proposed bullish arguments don’t hold much water.
Let’s begin with the easiest one. Store placement is always good news, but all things are relative on Wall Street. In this case, UAA competitors can put the squeeze on the upstart company. Last I checked, NKE is up 9% YTD, while ADDYY is up an amazing 27.6%. This equates to an ugly pricing war that’s only ugly to Under Armour stock.
Second, the growth potential is really a non-argument. Consider Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). At any point in time, nine out of ten internet users will search websites through Google. All other competitors comprise the one out of ten. That means any Google competitor has almost the entire search engine market to “grow into.” Will that ever occur?
Again, you have to go back to the primary factor — UAA stock is hopelessly outgunned against the elite.
In that sense, Under Armour is actually matured. It’s already acquired the athletic-hipster market, so they can’t grow there. However, they don’t have the resources to challenge the global hegemony of Nike and adidas. That management insists it can is what scares me and millions of investors.
Josh Enomoto is long SNE.