Global athletic retail giant Nike Inc (NYSE:NKE) has put on the full court press in the athletic retail industry, and the market loves it. NKE stock is up 20% off its mid-October lows. The S&P 500 is up just 3% in that time frame.
The big driver of the out-performance was Nike’s Investor Day, wherein management laid out bullish multi-year growth targets. Revenue is expected to grow at a high single-digit rate over the next five years. Earnings are expected to grow at a mid-teens rate over the next 5 years. Over the past five years, earnings have grown around 16% per year.
In other words, despite its massive size relative to peers, Nike’s growth isn’t expected to hit a saturation point and slow anytime soon. Why? Because Nike is getting aggressive. As a part of its new Consumer Direct Offense initiative, Nike is doing everything it can to not only maintain, but grow market share.
I’ve been bullish on this initiative for a while. I’ve thought for several months that it can continue to power NKE stock higher over the next several years. Now, with corporate tax reform coming, Nike is flirting with the prospect of being able to repatriate its huge overseas cash pile at a low cost.
That is yet another tailwind which should power Nike stock even higher. Overall, it still is tremendously undervalued relative to the market. I think that positions NKE stock to deliver out-sized gains into the foreseeable future.
A Big Time Move from a Big Time Player
Nike’s Consumer Direct Offense Initiative is a big-time strategy focused on growing Nike’s global market share. The first part of the initiative is streamlined global investment. This is something Adidas AG (ADR)(OTCMKTS:ADDYY) did a few years ago to super-charge their growth trajectory.
The idea is pretty straight-forward: global fashion trends start in global cultural centers, like Los Angeles, London and Paris. Focusing investment in those cultural centers allows brands to be at the forefront of burgeoning fashion trends.
For two years, Adidas was the brand at the forefront of fashion trends. Now, Nike has leveled the playing field. Considering Nike has far more resources, reach, and brand power, my money is on Nike being the brand to emerge at the forefront of burgeoning fashion trends in the future.
The second part of the initiative is accelerated product innovation. For years, shoe enthusiasts have criticized Nike’s lack of innovation. That seems to have been corrected. Between new Vapormax and Flyknit technology, Nike appears to be pioneering innovation in the shoe market. The experts in the industry agree.
Foot Locker, Inc. (NYSE:FL) management commented on their most recent earnings call that Nike is “on the verge of a major breakthrough in terms of product innovation.” Meanwhile, CEO Mark Parker told CNBC that Nike is developing the most exciting innovation pipeline he has ever seen at Nike.
The third part of the initiative is pushing direct-selling channels. This includes not only enhancing the company’s digital footprint through partnerships with ecommerce giants like Amazon.com, Inc. (NASDAQ:AMZN), but also building out an enhanced direct brick-and-mortar footprint.
These efforts appear to be working. Search interest related to the Nike brand is spiking to all-time highs. Meanwhile, many analysts have pointed to Nike stores as being among the most packed during the Black Friday weekend.
All in all, Nike is putting on the full court press across every aspect of athletic retail. This renewed aggressive stance towards gaining market share is what will push NKE stock higher over the next several years.
Bottom Line on NKE Stock
Even at $60, NKE stock is still tremendously undervalued relative to the market. Its stock is trading at 26x this year’s earnings for 16% growth prospects over the next several years. That is a price-to-earnings/growth (PEG) ratio of just 1.6.
The S&P 500 is trading at a PEG ratio of 2 (just over 20x 2017 earnings for roughly 10% growth).
If NKE were to trade at the same PEG ratio as the market, that would imply another 20%-plus upside for the stock.
That isn’t terribly unlikely considering everything that is going right for Nike right now.
As of this writing, Luke Lango was long NKE and AMZN.