Like most large growth companies, Nike (NYSE:NKE) stock sold off sharply at the end of 2018. The price of NKE stock dropped from $86 to as low as $68 during the last quarter of the year. Unlike much of the market, however, NKE stock has recovered rapidly, and is back near its all-time highs.
What has set Nike apart from the rest of the market? For one thing, the company’s growth efforts are continuing to pay off in a big way. It’s also worth considering the company’s strong direct-to-consumer retail channel. In a world where many brands and retail stores are falling victim to Amazon.com (NASDAQ:AMZN), NKE stock remains a solid option. Is it worth buying today though?
NKE Stock Cons
China Exposure: It’s to Nike’s credit that they’ve built a huge business in China. So many American brands have struggled or failed entirely in that market. In particular, it’s generally difficult to protect a company’s intellectual property when selling retail goods there. So, Nike deserves great respect for succeeding in the Chinese market.
At the moment, however, the Chinese market is a problem for NKE stock. There’s little sign that there will be an ceasefire in the trade war any time soon. Against that backdrop, it’s becoming increasingly clear that the Chinese economy is slowing down. Analysts are rightly skeptical how much Nike can continue to grow its Chinese sales as long as the economy there struggles. With Nike controlling almost one-fifth of the Chinese sporting goods market, it is an increasingly important part of Nike’s overall pie, and one that is unlikely to shine as brightly in 2019 as it did last year.
Expensive Stock: As is often the case, you have to pay up for Nike’s quality. With the recent rebound in Nike’s stock price, shares are now selling at 31x trailing and 28x forward earnings.
That’s in contrast to recent history. In 2017, NKE stock generally traded at just 22-23x forward earnings. Its current forward earnings ratio is near its highest level in years. Additionally, with the stock up here, the company’s dividend yield is just 1.1%. That offers little income from the stock and doesn’t do much to offer downside protection either.
Weaker Quarters Coming? Nike’s last quarterly report was just about perfect. Between strong Chinese sales and the solid momentum in women’s footwear, Nike has been doing everything right.
However, the path ahead could get more difficult. China should cool off in 2019. Global GDP growth on the whole is also trailing off, which will hit Nike sales in other international markets. There’s also the uncertain impact of Nike’s recent politically charged advertising campaign, which could cause some potential customers to choose other brands. Add it all up, and Nike probably won’t keep producing blow-out results every quarter of 2019.
NKE Stock Pros
Women’s Apparel: Traditionally, most investors have thought about Nike as a leading play on male sports gear. However, Nike has successfully broadened the brand out past its roots.
The latest quarterly results confirm Nike’s success in this fast-growing category. Nike posted a 20% revenue jump out of the women’s apparel division. Notably, Nike had all three of the top-selling women’s footwear products in the lucrative $125 and up price range.
Analyst Upgrade: Earlier this week, NKE stock got another endorsement. Cowen’s analyst, John Kernan, bumped his price target from $80 to $90 and moved the stock from a neutral to an outperform rating.
Kernan based this upgrade on the belief that Nike will be able to continue growing its profit margins. In particular, Kernan likes Nike’s fresh “Triple Double” strategy, which aims to double Nike’s velocity in getting new products to market, double its rate of innovation, and double its direct connections to consumers.
Increasing Sales To Consumers: Nike has managed to build out its own platforms for selling products directly to its customers. It owns almost 1,200 Nike stores. On top of that, its e-commerce business is booming.
This has allowed Nike to largely avoid the Amazon threat. Yes, Nike has a partnership to sell a limited amount of products on Amazon’s site. But it also sells a bunch through its stores and own website. Right now, those Nike-owned channels make up 30% of sales. That figure should keep rising in coming years. This insulates Nike from reliance on either Amazon or traditional brick-and mortar-retailers such as Foot Locker (NYSE:FL).
NKE Stock Verdict
It’s hard to get excited about buying Nike stock above $80/share when it was so recently trading below $70. Investors have been rushing back into high-quality stocks to start 2019, and Nike is deservedly part of that group.
That said, there are still some clear headwinds out there — China in particular is a potential problem. This could set up a nice trading opportunity. Should Nike show any weakness around the next earnings report or due to trade-war headlines, it could offer a good chance to buy the stock at a discount. Up here, at 28x forward earnings, however, NKE stock is a bit too pricey to get excited about.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
