Nike (NYSE:NKE) stock has been on a torrid run. Over the past three months, shares are up nearly 50%, as Wall Street has realized that Covid-19 is not the “world ender” it was made out to be and as consumer spending trends have rebounded.
This big rally in NKE stock will get tested soon, when Nike reports fourth quarter earnings towards the end of June.
I think NKE stock will survive that test. More than that, I see shares sustaining their current strength, and pushing above $100 in the near future.
Here’s why.
Everything Is Trending in the Right Direction
When it comes to Nike, everything is trending in the right direction for this company.
The global economy is gradually reopening on the back abating Covid-19 fears, and consumer spending — particularly discretionary spending — is rebounding. U.S. retail sales rose 17% month-over-month in May, paced by a 188% increase in clothing spending. UK retail sales rose 12% in May. UK clothing sales rose 25%. China’s retail sales have also rebounded over the past few months, and clothing/footwear sales are now essentially flat year-over-year.
Meanwhile, sports are coming back, and gyms are reopening. Those two things should promote accelerated spend on athletic apparel, a market in which Nike still remains the undisputed king. There’s also a sense out there that the coronavirus pandemic has more deeply emphasized the importance of health and fitness, and could accelerate the shift towards consumers leading healthier, more fit lifestyles — which, of course, leads to more athletic apparel sales.
At the same time, Nike is pushing hard on the corporate social activism front again, this time showing support for the nationwide “Black Lives Matter” movement. The last time Nike pushed hard on the corporate social activism front was back in September 2018 with an advertisement featuring former NFL quarterback Colin Kaepernick (who is known as the first player to take a knee during the national anthem).
This campaign worked, because Nike’s core audience is younger, skews left on the political spectrum and tends to idolize athletes. Revenues for the three months ended August 2018 rose 9% in constant-currency. For the three months ended November 2018, they rose 14%.
A similar dynamic should play out this time.
Zooming out, then, pretty much everything is trending in the right direction for Nike. The broad implication is that this company’s numbers should be pretty good for the foreseeable future.
Nike Stock is Fairly Valued
Because the valuation remains tangible, pretty good numbers should sustain the current rally in NKE stock.
Nike owns about 2% of the global apparel market. That share has been steadily climbing over the past few years thanks to athletic apparel adoption tailwinds, as well as Nike’s purpose-driven marketing, relentless product innovation and star-studded athlete portfolio.
All of these favorable market share drivers project to persist for the foreseeable future. As they do, Nike will continue to gradually expand share in the ~5% growth global apparel market. This dynamic lays the foundation for steady, 6% to 10% annualized revenue growth out of Nike for the next ten years.
Gross margins will improve on the back of increased consumer demand, less discounting and higher average selling prices. Opex rates will gradually shrink thanks to scale and positive operating leverage. Profits should rise at a steady low double-digit pace.
Assuming so, Nike is positioned to report $10 in earnings per share by fiscal 2030.
Based on a 25-times forward earnings multiple — which is the historically-average multiple for footwear stocks — that implies a fiscal 2029 price target for NKE stock of $250.
Discounted back by 10% per year, that implies a fair 2020 price target for NKE stock of over $100.
Bottom Line on NKE Stock
Nike stock is a long-term winner. There’s no doubt about that.
There’s also no doubt everything is trending in the right direction for this company at the current moment. Or that the company’s earnings over the next few quarters will be quite good. Or that the valuation remains tangible.
So long as all those things remain true, I say stick with the rally in NKE stock.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not own a position in any of the aforementioned securities.
