The buy thesis on Nike Inc (NYSE:NKE) stock is surprisingly simple.
Nike is the biggest and best brand in all of athletic apparel. Competition has been hot and that has been eating into Nike’s dominance, but Nike is starting to respond to that competition with strategic initiatives of its own. As those initiatives play out over the next several quarters, Nike will regain its dominance of the athletic retail market. NKE stock, which is languishing around 52-week lows, will jump back up.
The actionable investment takeaway is also pretty simple. Buy now at discounted prices and wait for those strategic initiatives (which include a push towards direct and streamlined investment through global cultural centers) to pay off.
Sometimes it’s tough to believe an investment thesis can be that simple, especially when NKE stock is sitting near 52-week lows while the Dow is making all-time highs.
But patience will be rewarded for NKE shareholders. Buying now is simply investing in a secular growth name at a marked discount.
Nike Is About To Bounce Back
adidas AG (ADR) (OTCMKTS:ADDYY) is kicking Nike’s butt. There is no hiding it.
Adidas has been on the rise, while Nike has ceded significant market share. Recent data points include NPD numbers (which show that Adidas has overtaken Jordan Brand as the second best selling sneaker in the United States) and results from Piper Jaffray’s Taking Stock With Teens Survey (where Nike’s mind-share as a preferred footwear brand fell from 51% last year to 46% this year, while Adidas saw its mind share rise from 6% to 11%).
This butt kicking started in early 2015, when Adidas rolled out a new business strategy which emphasized speed, cities and open source. On the speed side, Adidas emphasized accelerating its speed to market by reducing production lead times, increasing direct sales and growing its e-commerce business. On the cities side, the German footwear company recognized that global trends start in global cities, and consequently streamlined investments into six global cities. On the open source side, Adidas vowed to increase both partner and consumer engagement.
The strategy worked.
Nike took note, and now, Nike is rolling out a similar strategy.
Nike announced its new business strategy, Consumer Direct Offense, back in June, and it looks like a page right out of Adidas’ playbook. Nike is doubling down on innovation and speed. The footwear giant wants to cut product creation times in half, allowing for innovative new products to come to market more quickly than ever before. Nike is also focusing on global culture centers, streamlining investments into 12 global cities. The company is also focused on enhancing connections with both consumers and partners.
Sound familiar?
Essentially, Nike is doing exactly what Adidas did two years ago. Now that the playing field is even, who wins in this fight?
Well, Nike has more reach. It’s far bigger. The brand name is still the most powerful in athletic retail (see Piper Jaffray survey results which give Nike 46% mind share to Adidas’ 11%). Nike’s athlete portfolio is far broader and much deeper, especially in the all important basketball market.
Plus, Adidas is at the center of a huge bribery scandal which is rocking the collegiate basketball world. Although the investigation is ongoing, the only shoe company alleged of anything so far is Adidas. This sort of negative press doesn’t help when you are fighting against Goliath.
Bottom Line on NKE Stock
At these levels, NKE stock is a classic “buy-and-hold” situation.
The stock trades at a marked discount to its 5-year average valuation due to ADDYY eating market share. That makes sense. But NKE has positioned itself to rapidly recapture lost market share over the next several quarters. Once the ADDYY competitive headwind is in the rear-view mirror, NKE stock will bounce back to trading at its 5-year average valuation.
This could happen as soon as this fiscal year. A 5-year average 26-times multiple on fiscal 2018 earnings estimates of $2.32 imply a year-end price target of roughly $60. That is nearly 20% upside in less than 12 months.
Big takeaway? Buy now. Hold for the next several quarters and maybe even years.
As of this writing, Luke Lango was long NKE.
