I will start with the conclusion first. There is more good than bad in this Nike (NYSE:NKE) earnings report. Long-term, Nike’s revenue miss is not a reason to sell Nike stock, as the broader thesis remains intact.
Investors on Wall Street have a habit of overshooting trends. Recently, the experts have all been in agreement that NKE was a stock that everyone should absolutely own. Then, at some point like today, they realize their overzealousness and sell NKE down in droves.
The important thing that follows such a situation is how far they fade it. Last year, we saw a similar situation where they were enamored with Nvidia (NASDAQ:NVDA) and they took that stock too far, too fast. Then, it got cut in half last year from the all-time high.
Today the thesis is that NKE situation here is completely different than NVDA and the dips in Nike stock here could soon be an opportunity.
Nike Stock Earnings
Last night, Nike reported earnings and the stock is falling 4.5% on the headline. The problem is that the stock came into the earnings up 19% year-to-date and it actually set an all-time high yesterday. So giving back a little on good news is healthy as it builds a better base for more upside. This would also depend on the markets continuing the rally this year.
Management delivered a strong report in the face of adversity. They beat on almost all metrics especially in China and the Eurozone where they faced the biggest hurdles. There, NKE grew sales double digits in spite of currency, geopolitical headwinds and central bank interference.
So management is doing its job very well. You don’t maintain high growth in a monster company without excellent execution. It’s not that Nike delivered a bad report. The selling today is more a matter of overexuberance from Wall Street going into earnings.
But while gross margins continue to expand, expenses remain a concern. But I don’t worry about it for as long as they are putting it to good use and the strong results prove it. This is a proven team and I don’t have a reason to doubt Nike now.
How to Play Nike’s Earnings Dip
This dip is an opportunity to hold the stock for the long-term. It is definitely not a reason to leave money on the table. Nike’s earnings report doesn’t change the broader “buy” thesis.
However, Nike stock is not cheap; It sells at 33x earnings, but it’s not bloated either. It’s much cheaper than Lululemon (NASDAQ:LULU), which sells at a 44 P/E, and Under Armour (NYSE:UA) still operates with a loss. Clearly, it’s not an overvalued stock, so it would make for a reasonable starting point.
Technically, since the stock is near all-time highs and falling there are some levels to watch for support.
The volume profile since the December lows suggests that the NKE stock value area spans all the way to $75 per share. Obviously, it’s not likely to head straight there as there are several interim support levels.
The one area that interests me the most is $82/$83 per share. It has been pivotal since last June. I would be surprised if the bulls would let it fail without a strong fight. This usually creates congestion, which translates into a stall in the fall.
Bottom Line on NKE Stock
The next lowest big pivot area is around $79/$80 per share. This was the ledge from which NKE fell last 12% last October, so I imagine will be another battle zone for bulls and bears if the first support fails. These are not forecasts but mere scenarios that I need to know if I am trading the stock.
I don’t believe that this dip will cause many analysts to downgrade their outlooks on it as it is still trading below their average price targets. So if markets, in general, are going to be higher later then so is Nike stock.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.