Federer Is Out, and That Is Yet Another Risk for Nike Stock

Roger Federer leaving Nike is a sign of the times in the athletic retail world

Nike Stock Earnings Reaction Offers A Healthy Reset And Buying Opportunity

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Tennis superstar Roger Federer walked onto Centre Court at Wimbledon on Monday, and Nike (NYSE:NKE) fell. As of Monday afternoon, Nike stock was down 3% on the news.

Why? Because Federer, who many consider to be the greatest tennis player of all-time and is a global icon for the sport, has always been a Nike guy. The Swoosh and Federer have been long-time allies. But on Monday, July 2, the Swoosh wasn’t anywhere on Federer’s shirt or shorts. Instead, he was outfitted by Japanese fashion brand Uniqlo.

The story behind the story? Federer’s mega-contract with Nike expired in March. He didn’t re-sign. Instead, he signed with Uniqlo, which reportedly offered him $300 million over the next 10 years.

That is a pretty big loss for Nike. As far as Nike athletes go, Tier 1 consists of Michael Jordan, Christiano Ronaldo, and LeBron James. They still have all those guys.

But Federer is at the forefront of Nike’s Tier 2 athletes. Thus, losing Federer is a big blow to the Nike brand globally. Unfortunately, the loss comes at a time when Nike stock is at an all-time high valuation, just had a big pop from earnings, and is also losing other notable endorsers.

In other words, the fundamental growth narrative is weakening at a time when the stock is strengthening. That disconnect implies that Nike stock is due for a rough path in the foreseeable future.

Here’s a deeper look.

Federer’s Departure Adds to Nike’s Risks

Federer isn’t a small name in the sports world. A quick glance at Google Trends and Instagram followers reveals that while he is no James or Ronaldo, he is also much more popular on a global scale than other top-tier athletes. Indeed, Federer’s former Nike contract was one of the top 10 athlete endorsement contracts in the world.

Thus, losing Federer isn’t immaterial to the Nike growth narrative. It is a serious negative.

Moreover, Federer’s departure isn’t an anomaly. It is a sign of the times in the athletic retail world. Those times are defined by big time athletes signing with upstart brands in the spirit of today’s entrepreneurial culture, and creating a more equal playing field in the athletic retail game.

Namely, Puma has a made a huge splash by signing the top two picks in this year’s NBA draft, and Adidas continues to recruit top talent to its brand. (Presently, rumors are flying around that widely-followed rapper Drake will jump ship from Nike to Adidas.)

In other words, Nike still has the top athletes in the world and the top athletic apparel brand in the world. But the competition is also getting better. And the trend presently runs against Nike, as athletes globally are starting to partner with smaller, lesser known brands in the spirit of being entrepreneurs and starting their own thing, as opposed to joining the Nike kingdom.

Nike Stock Isn’t Priced for Any Risk

If Nike stock was priced at regular levels, the above risks wouldn’t matter. Nike is still king in athletic retail.

But Nike stock isn’t priced at regular levels. It is priced at far-above-regular levels. The stock’s average forward earnings multiple over the past five years is 24. The current forward earnings multiple is 30. That means the stock is 25% more richly valued now than it has been over the past five years.

With that in mind, the only way Nike stock can continue to outperform in the near to medium term is if the growth narrative is 25% better than it has been over the past five years.

I just don’t think that is the case. Granted, Nike’s North America business is bouncing back. Production innovation and a direct sales strategy is boosting the company’s overall growth prospects. Meanwhile, margins are starting to moderate and bounce back.

These are all great things, and marked improvements from where Nike was over the past two-plus years. But competitive risks remain very big. Adidas remains red-hot. Puma is the new favorite underdog. Uniqlo is making a big push. And the recent success of Lululemon Athletica (NASDAQ:LULU) cannot be ignored.

Overall, the growth narrative at Nike is better now that it has been over the past five years. But 25% better? That is hard to believe considering the numerous competitive risks still facing the company.

Bottom Line on Nike Stock

I was a big bull at $50 when this was an undervalued, misunderstood stock with improving fundamentals that weren’t priced in.

Now, I’m a bear at $80 when this is an overvalued, widely hyped stock with improving fundamentals that have been overly priced in. The Federer departure highlights that competitive risks remain in the athletic retail market, and as those competitive risks continue to pressure operations over the next several quarters, Nike stock should normalize downward.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2018/07/federer-out-yet-another-risk-for-nike-stock/.

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