The Street is starting to getting bullish on athletic apparel giant Nike (NYSE:NKE).

NKE stock recently received a pair of upgrades from Wall Street. Piper Jaffray upgraded NKE stock to “Overweight” from “Neutral.” That was on the premise that North America growth is re-accelerating, and that the DTC business will provide a big sales lift over the next several years. Susquehanna, meanwhile, boosted NKE stock to a “Positive” from “Neutral,” saying Nike is stealing market share back from Adidas (OTCMKTS:ADDYY).

Despite the two upgrades, the consensus Wall Street price target for NKE stock is just $84 (2% upside), while the high is $93 (13% upside). In other words, although analysts like NKE stock, they also realize that upside in the near- to medium-term isn’t all that big.

I agree with that consensus thesis. The fundamentals on Nike are strong right now. The company is taking back market share from Adidas. North America revenue growth is coming back into the picture. The DTC business is ramping nicely. Gross margins are starting to head in the right direction.

All is well in the Nike kingdom.

But, most of that goodness is already priced into NKE stock. The stock is trading at valuation levels that are historically unsustainable. As such, valuation risk is high, but operational risk is low.

In the big picture, NKE stock should be able to head higher over the next 12 months, especially as investors look for growth outside of the tech space. But upside during that stretch is capped by what is already a pretty stretched-out valuation.

Nike’s Fundamentals Are Strong

Nike has been, is, and will always be a really strong company with a powerful global brand. Consequently, the fundamentals for this company promise to always be good. But, at the present moment, they seem better than normal.

In the athletic apparel industry, the past several years have been defined by Adidas taking market share from Nike, especially in the North America market. Nike was on the defense, and as such, sales and margins were dropping. But, that is changing course now as Nike has adopted its new Consumer Direct Offense initiative, and is punching back against Adidas.

Nike has landed a few hits already. North America sales growth is dramatically improving, and actually inflected into positive territory last quarter. Nike Direct is growing at a double-digit pace. International sales growth remains robust. Gross margins are starting to head higher.

Overall, it looks like the era of Adidas killing Nike is over. That means the era of sluggish sales growth and gross margin compression at Nike is also over. Going forward, Nike should be able to outgrow the athletic apparel industry globally (6.5% growth rate), and margins should head higher.

NKE Stock’s Present Valuation Is Historically Unsustainable

It is tough to see NKE stock dropping in a world where its revenues, margins, and profits are all trending higher. I think that will happen over the next several quarters, so it is tough to see NKE stock dropping during that stretch.

But, it is equally hard to see NKE stock rallying in any big, 10%-plus way.

Mostly because of the company’s improving growth trends, NKE stock is trading at levels that are historically unsustainable. The company’s price-to-sales multiple (3.6X), forward earnings multiple (30X) and trailing EBITDA multiple (24X) are all at levels either equal to or above Nike’s historical peak valuation, which happened in late 2015 before a big collapse in 2016.

Meanwhile, I think earnings growth runs around 12-13% per year over the next several years, driven by high single digit revenue growth, slight margin expansion, and buybacks. The valuation should normalize during that stretch. Let’s assume the forward earnings multiple normalizes to the five-year norm of 24.6X. That would be roughly 4% compression per year.

Thus, over the next five years, I see Nike growing earnings by roughly 12-13% per year, but the valuation compressing by 4% per year. That combination should lead to sub-10% annualized returns in a multi-year window.

Bottom Line on NKE Stock

The fundamentals are about as good as they’ve ever been, but the valuation has risen to a level that appropriately reflects that reality. As such, while NKE stock will likely head higher over the next several months, it also likely won’t repeat its trailing 12 month gains of 50%.

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