Shares of Under Armour Inc (NYSE:UAA) are soaring higher today after the athletic apparel company posted better-than-expected first-quarter results, but I don’t really understand the move higher. It was only a slight beat on the top and bottom, the guidance remained unchanged, footwear sales are flat-lining, North American revenues are actually down and the valuation on UAA stock remains rich.
There isn’t much supporting the rally.
I think investors should ditch UAA stock and pick up Nike Inc (NYSE:NKE) stock instead.
Here’s why.
Under Armour Is No Nike
For a while, the Under Armour hype story was that UAA was going to morph into the next NKE.
That couldn’t be farther from the truth, and recent quarterly numbers prove that.
Under Armour reported that total revenues rose 7% in the quarter. That is a pretty similar growth rate to the 5% sales growth Nike experienced last quarter. The big difference, though, is that Under Armour’s quarterly sales totaled $1.1 billion. Nike’s were $8.4 billion. So despite Nike selling roughly 7.5 times more stuff than Under Armour, the two are growing at very comparable rates.
In fact, when Nike’s revenues were running around $1.1 billion per quarter back in 1995, revenues were up 29% year-over-year.
That is much more than 7%.
In North America specifically, Under Armour is actually ceding market share to Nike despite having sales that are less than one-fourth the size of Nike’s revenues. Under Armour reported that North America revenue dropped 1% in the quarter to $870 million. Meanwhile, Nike reported that North America revenue rose 3% to nearly $3.8 billion last quarter.
This is a scary warning sign for UAA stock. Under Armour’s revenues in North America are already acting saturated at such an early point. That doesn’t bode well for Under Armour’s international growth story.
Growth in EMEA (Europe, Middle East and Africa) and Asia-Pacific has been on fire for Under Armour. EMEA revenues rose 55% in the quarter while Asia-Pacific revenues rose 60%. That is much better than NKE, which reported a 4% rise in Western Europe sales, a 1% rise in Central and Eastern Europe sales, and a 9% rise in Greater China sales.
But this has almost everything to do with scale. Under Armour’s EMEA revenues were just over $100 million last quarter. Nike’s total Europe revenue stood at just under $1.9 billion last quarter. In other words, Nike is about 20 times as big as Under Armour in Europe.
Same story in Asia. Under Armour’s Asia-Pacific revenues were $86 million last quarter, while Nike’s revenues in Greater China alone surpassed $1 billion last quarter.
Once UAA’s sales mature in those markets, growth rates will come down quickly, much like they did in North America.
And if the North America trend holds up, the collapse in international growth rates could happen quite soon.
But UAA Stock Is Way More Expensive Than NKE Stock
UAA stock isn’t ready for a collapse in international growth rates. The Street actually expects Under Armour’s revenue growth to accelerate next year to about 14%.
I think that means estimates are too aggressive for next year. Even using those aggressive estimates, Under Armour stock still trades at 40.4 times next year’s consensus earnings estimate. Nike stock trades at 21 times next year’s consensus earnings estimate.
But as I pointed out earlier, the two companies are growing at the same rate. It doesn’t make sense that UAA stock is almost twice as expensive as Nike stock.
This is especially true considering Under Armour’s second-biggest segment, footwear, is actually growing at a slower pace that Nike footwear. UAA footwear sales were up a mere 2% last quarter, while NKE reported footwear sales rose 5% last quarter.
Bottom Line on UAA
Under Armour is over-valued here. Today’s rally feels like a dead-cat bounce, and I expect shares to give up their gains over the next several weeks.
For the long-term, ditching UAA stock and buying NKE stock feels like the right move. There is just too much baked into Under Armour’s valuation, and too little baked into Nike’s valuation.
As of this writing, Luke Lango was long NKE.
