In early 2019, the market freaked out about a warning shot from the world’s largest consumer tech company, Apple (NASDAQ:AAPL), about a huge slowdown in the world’s hottest economy, China. But, two weeks before that, the world’s largest athletic apparel company, Nike (NYSE:NKE), reported robust quarterly numbers which comprised red-hot and accelerating growth in China. A day later, NKE stock was up more than 8.5% from where it closed the previous day.
“We have not seen any impact on our business from some of the U.S.-China dynamics that we’re all reading about,” CFO Andrew Campion told participants on Nike’s earnings call. “We’re mindful of those, but in the context of being mindful of those, we continue to see very strong signs of momentum in China.”
The implication? It doesn’t matter if the China economy is slowing or not, Nike is firing on all cylinders. Global consumer demand isn’t decelerating. Instead, it’s picking up, irrespective of macroeconomic uncertainty. This resiliency is impressive. It’s also a reason to buy NKE stock.
Betting on Operational Strength
At current levels, Nike stock is trading substantially below my best guess for the stock’s fair value. This happens all the time and for any number of reasons, including macroeconomic uncertainty. But, with NKE, recent operational strength supports the case for this stock heading up to and above fair value.
The big picture shows Nike is on fire right now. But the valuation on NKE stock doesn’t reflect this. Instead, it reflects broader macroeconomic uncertainty. But, Nike has proven resilient to this. As such, the stock’s valuation discrepancy won’t last forever. The valuation will eventually correct higher, and when it does, Nike stock will jump.
Can’t Make an Apple(s)-to-Nike Comparison
If you just looked at Apple CEO Tim Cook’s letter to shareholders wherein he cut quarterly guidance and cited glaring weakness across emerging markets, you’d think the global economy is on the verge of collapsing.
But, this may be more of an Apple-specific problem than an emerging market weakness problem. Less than two weeks prior, Nike reported second quarter numbers which were really good. Specifically, they were really good where Apple’s numbers were really bad: in emerging markets.
In China, Nike’s sales rose 31% in Q2, that’s after a 20% rise in Q1. (Digital sales in the country grew even more.) And that Q2 is the highest growth rate Nike China has posted in recent memory.
Meanwhile, in the Asia-Pacific region, the athletic-apparel maker saw sales gain 15%. Similar sales increases were posted across all geographies, including in North America and Europe, Middle East, and Africa.
Global Slowdown? What Global Slowdown?
The company is doubling down on product innovation, and getting products to consumers faster than ever. Branding is as strong as it’s ever been. The athlete line-up remains second-to-none. New store concepts with unique technology integration are reinvigorating consumer interest. The company is also aggressively and successfully turning into a lifestyle brand with broad appeal beyond athletes.
Importantly, everything is clicking at a time when everyone is worried about a global economic slowdown. This implies one of two things. Either the global economy really isn’t slowing all that much. Or, the global economy is slowing, and Nike is resilient to that slowdown.
It doesn’t really matter which of those is true. Both are positive for NKE stock. As such, regardless of how global economic growth plays out over the next several quarters, Nike should report strong numbers.
Nike Stock Is Pretty Cheap
The bull thesis on NKE stock is that the valuation does not presently account for the fact that this company is on fire.
From fiscal 2015 through fiscal 2018, Nike saw revenue growth fall from 14% to 4%. That’s changed this year. In Q1, revenue was up 9%. Last quarter, it jumped all the way back to 14%. For the full year, management is expecting high single-digit to low double-digit revenue growth, so ~10%.
That is a multi-year high revenue growth rate. Also, gross margins are consistently expanding for the first time since fiscal 2016. Management expects them to keep expanding for the foreseeable future, too, given premium product assortments. As such, this is a company operating at a multi-year best revenue growth rate alongside margin expansion for the first time in years.
The last time Nike featured this dynamic (double-digit revenue growth and margin expansion) was in 2015. At that time, Nike stock was trading at 30x forward earnings. Today, Nike stock trades at 28x forward earnings. That’s a favorable valuation set-up.
Moreover, this stock should be able to rally towards $85 within the next six months. High single-digit to double-digit revenue growth isn’t sustainable. But, for an industry leader in an industry with rising adoption rates, mid single-digit revenue growth is sustainable. At that rate, Nike could easily pass $50 billion in sales by fiscal 2024. During that stretch, operating margins should benefit from a double tailwind of gross margin expansion and SG&A leverage.
Model that out and earnings of $5 a share by fiscal 2024 seems achievable. A historically average 25x forward multiple on that implies a fiscal 2023 price target for Nike stock of $125. Discounted back by 10% per year, that give you a fiscal 2019 price target of $85.
Bottom Line on NKE Stock
NKE stock has fallen more than 10% off recent highs due to macroeconomic and market uncertainty. But, recent numbers underscore that Nike’s operations are resistant to that noise and the stock should be, too. That means Nike stock is a buy on this dip, and that a rally back to all-time highs in 2019 has visibility.
As of this writing, Luke Lango was long AAPL and NKE.
