When the momentum stalls on a growth company, the impact is almost always severe — and prolonged. Just look at Under Armour Inc (NYSE:UA, NYSE:UAA). About two years ago, the company’s shares seemed to defy gravity, fetching over $100. But since then, nothing has seemed to go right. Consider that UAA stock is now at a lowly $19.84.
Now, there are certainly many investors who are betting that the company will regain its glory. When Under Armour reported its earnings in late April, the shares jumped 10%. But unfortunately, the rally would quickly fizzle.
So what’s going on here? Well, I think there are fundamental issues with the company — and they will take quite a bit of time to resolve.
Problems for UAA Stock
First of all, Under Armour is facing tough industry headwinds. Keep in mind that the company has relied heavily on brick-and-mortar retailers for its distribution. But of course, the impact of e-commerce powerhouse Amazon.com, Inc. (NASDAQ:AMZN) has taken a toll. Note that several of UAA’s major retail partners — The Sports Authority, Golfsmith International, Eastern Outfitters and Sport Chalet — have gone bust.
Despite all this, it is tough to gauge the e-commerce business for the company. Consider that the latest 10-Q does not provide much detail.
OK, but what about the connected fitness business? Shouldn’t this be a driver for UAA stock? Interestingly enough, so far, it hasn’t done much. Even though the company has over 200 million users, this hasn’t translated into meaningful growth. In the latest quarter, revenues inched up by a mere 2.3% to $18.9 million.
Although, it is encouraging that Under Armour has made substantial investments in its digital infrastructure, especially with the implementation an SAP SE (ADR) (NYSE:SAP) system. According to UAA CEO Kevin Plank, during the earnings call:
“This empowers our teams to leverage our speed to create, drive and accelerate value for our consumers through new personalized products, services and experiences. So what used to take weeks or even months for us to get information on new product performance, trending workouts and demographics, now takes seconds with the speed and analytical horsepower provided by this incredible consumer insights engine.”
Yet technology is far from a cure-all. Let’s face it, Under Armour is essentially in the fashion business, which demands strong creative abilities. But lately, UAA stock has been falling short. It seems that the approach is to shell out huge amounts for endorsement deals. However, this can be extremely tough when the mighty Nike Inc (NYSE:NKE) has enormous resources to fight this kind of brutal war.
Basically, if UAA really wants to move beyond sports, shouldn’t it change up its marketing to reflect this? It thinks so. As InvestorPlace.com’s Josh Enomoto noted: “Rather than go purely in the athletic direction, Adidas AG (ADR) (OTCMKTS:ADDYY) partnered with hip-hop artist Kanye West and created the Yeezy, ‘which has supplanted the Air Jordan as the prime status symbol among sneakerheads.’”
So yes, the financials for UAA reflect all this. In Q1, North America sales – which represent about 80% of the total — fell by 1%. A big part of this was due to the lagging performance of the footwear category as the Steph Curry offerings have not lived up to lofty expectations.
Bottom Line on Under Armour Stock
No doubt, Plank is one of the world’s top entrepreneurs, having taken on the giants in his industry. But he may not necessarily have the skills sets to take on the next stage of the company’s journey. The company is getting more complex as its ventures into new categories, which involves taking on fierce competition.
Besides, the valuation on UAA stock is far from cheap, with a forward price-to-earnings ratio at 38X. Hey, this is even higher than the fast-growing Facebook Inc (NASDAQ:FB)!
So given all the challenges, it’s probably a good idea to wait on UAA stock for now, especially since the company’s own guidance on revenues — which is at 11% to 12% — is far from encouraging.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.