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On Holding Might Make a Great Shoe, But Its Stock Is No Shoo-In

How does an initial public offering (IPO) gain momentum and deliver strong financial performance? This is not an easy question to answer. There are too many important parameters, including market conditions and investor sentiment. With major stock indexes near all-time highs, On Holding AG (NYSE:ONON) went public via IPO in mid-September. ON stock was priced at $24 for the IPO.

A photograph of a person running along the side of a road.

Source: It for you / Shutterstock.com

Timing is very important to the success of an IPO. Is ONON stock worth considering now? My answer is twofold. Yes, the stock is worth monitoring, but now is not the time to blindly add it to your portfolio. Let me explain.

Not all IPOs are the same. Some are good and perform well, some are too stretched in terms of valuation and a few of them are in between with a reasonable valuation and great business prospects. On Holding has the potential to be in that third category. Here is why.

ONON Stock: What the IPO Performance Tells Us

On Holding sells shoes and other athletic apparel for indoor and outdoor sports and training. It offers numerous categories of products to appeal to all lifestyles.

On describes its lofty ambitions on its website: “On was born in the Swiss alps with one goal: to revolutionize the sensation of running. It’s all based on one radical idea. Soft landings followed by explosive take-offs. Or, as we call it, running on clouds.”

On’s custom sole, CloudTec, is what makes On shoes unique, and is designed for a premium running experience. But a great product alone doesn’t guarantee success for the company making it; that depends on management, financial performance, profitability, a strong balance sheet and positive free cash flows.

After launching its IPO at $24, ON stock closed on its first day at $35. That’s not a bad day, but it’s not a phenomenal one either. The trading volume for ONON stock on its first day was 13.77 million. Two days later it reached a high of $40.80 on volume of just 3.66 million. The price and volume have both trended downward since, closing on Oct. 12 at $30.54 with volume of 1.16 million.

This severe decline in volume shows investors are skeptical now and are waiting for developments like earnings results.

That’s a reasonable reaction. This lack of enthusiasm is fully justified without any major catalysts. Strong financial results would be a positive force for the stock.

On’s Impressive Sales Growth

When On announced its IPO, the announcement came with some good news. The company highlighted an average annual net sales growth of 85% in the last decade, a 59% gross margin in the first half of 2021 and net sales of 315 million CHF ($340 million) in the first half of 2021, 85% better than the year-prior period.

The company also highlighted its operation in more than 60 countries. This is good news as it diversifies market penetration and gives On access to a global market share in the shoe industry, but it comes at a cost: namely, higher operating and marketing expenses.

This revenue growth is impressive. But I am skeptical about its sustainability.

ONON Stock and the IPO Market

An article from a couple years ago highlighted five key factors that make IPOs successful:

  • Sector and industry
  • Firm age
  • Valuation
  • Path to profitability
  • Sales growth

My biggest concerns for ONON stock are the sales growth, valuation and path to profitability. I want the sales growth to continue and for profitability to occur soon and last. What about valuation?

Assuming On’s sales for the latter half of 2021 match the first half, that would mean sales of about $680 million. At its current market capitalization, the multiple of market capitalization to the sales would be about 15 times. That’s too high without any annual or quarterly reports since the company went public. There’s very little data to evaluate, but the stock seems too expensive right now.

On Holding has set very high expectations based on its premium footwear. Without public financial data, though, I would advise waiting to evaluate its true strengths and weaknesses. For what it’s worth, I would like the company to succeed, and the stock may reflect this.

On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.


Article printed from InvestorPlace Media, https://investorplace.com/2021/10/onon-stock-might-make-a-great-shoe-but-its-stock-is-no-shoo-in/.

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