On Tuesday, Goldman Sachs Group raised its rating for Under Armour Inc. (NYSE:UAA) from “Neutral” to “Buy”. Analyst Alexandra Walvis also raised her price target for UAA stock to $28 from $24. That represents a 30% upside from where shares were trading on Wednesday morning, making the upgrade worth examining.

Under Armour stock has lost more than half of its value over the past four years and although most agree the firm is unlikely to return to its former glory any time soon, there could be a meaningful rebound on the horizon this year if you believe Walvis’ theory. 

Upgrade

Walvis cited an improving consumer spending environment in 2019 for her optimism. She said that tax reform benefits, a robust labor market and tailwinds from the energy market will all contribute to middle- and lower-income consumers loosening their purse strings. Walvis also noted that athletic wear has been popular among the public and that trend is likely to endure. Plus, shopping dollars are increasingly being spent within the e-commerce space and off-mall store formats, both of which fall under the UAA umbrella.

On Under Armour’s business specifically, she said she expects to see “longer-term growth on the horizon from innovation, international and footwear.” Wallis also said she was encouraged by the company’s progress on cost and inventory management.

Will It Play Out?

The biggest issue I take with Walvis’ expectations is that much of her optimism comes from the sector as a whole, so while those trends are somewhat beneficial to UAA stock, they’re also beneficial to its competitors like Nike (NYSE:NKE) and Lululemon (NASDAQ:LULU). In fact, I’d argue that they’re more beneficial to the latter two, because UAA has yet to position itself as a lifestyle brand rather than an athletic performance company. 

Around 90% of Under Armour’s merchandise is classed as performance goods, so the company is missing out on a huge segment of consumers who are looking for athleisure wear. That’s the athletic apparel fashion trend that Walvis is talking about and, unfortunately, UAA’s current lineup misses this category completely. 

UAA has missed the boat when it comes to meeting consumer demand and, for that reason, the brand has fallen out of favor among the public. This has translated into a major loss of brand value, as the firm turned to low-price channel partners like Kohl’s (NYSE:KSS), discounting and promotional activity to reignite consumer interest. Under Armour goods don’t have the same clout they once did and that’s a problem for the company going forward, because it may not be possible to rebuild all of that brand equity. 

I’d agree with Walvis’ suggestion that there’s growth ahead for Under Armour’s international business. UAA management said it expects to see low-double-digit growth within its international business and that segment should start to make up a larger percentage of overall sales over the next 5 years. But, for now, Under Armour is generating about 75% of its revenue from North America — a mature market where the firm is also facing strong competition. For that reason, I’m not expecting to see any meaningful growth from UAA anytime soon. 

Valuation

So, in my opinion UAA’s business can offer tepid growth over the next 5 years if it’s able to deliver on its international and direct-to-consumer initiatives. But I’d argue that the assumption that it will deliver, which I believe is a big one, is already more than priced in to UAA stock’s current valuation. 

Under Armour stock trades at more than 90 times its forecasted earnings. That’s triple what NKE is trading at and more than double LULU’s valuation. 

The Bottom Line on UAA Stock

I’m not saying UAA stock is going to crash and burn, but I’d be very surprised to see it trading at $28 any time soon. The company has too many obstacles to clear before its growth story looks believable and I think there’s plenty of volatility in store before the share price can make a meaningful recovery.

If the share price makes its way back to the mid-teens I’ll become a buyer, but at $20 per share I think UAA is fully valued. 

As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.