- After selling off after earnings on Friday, NKE has now been halved since November
- Inventory issues are a problem, but it’s not just limited to Nike
- At these lows, investors can look to the NKE low if they are sure of the answer to a simple question.
In this bear market, a number of well-known stocks recorded dramatic declines. The fall of Nike (NYSE:) is among the most surprising.
On November 5, NKE stock closed at an all-time high of just under $176. In less than 11 months, the stock has fallen 53%, wiping out more than $140 billion of its market capitalization.
That said, while the magnitude of the drop is surprising, the fact that Nike stock has struggled is not. The overall market is down: the , of which Nike is a member, is down 24% since November 5.
Meanwhile, the inventory issues that plagued Nike’s disappointing fiscal year aren’t unique to the company. Even the nation’s top retailers, including Walmart (NYSE:) and Target (NYSE:), have seen their apparel inventory pile up this year. After consuming goods in 2020 and 2021, consumers around the world in 2022 are spending their money outside the home.
These consumer trends have driven companies like Nike to windfall profits in the post-pandemic environment. The bill for this performance is now due.
But, long-term, NKE at these levels looks attractive to investors with one simple belief: Nike remains the same innovative, market-leading behemoth it was before the pandemic. That appears to be the case, and that’s enough to at least think long and hard about NKE’s possession after Friday’s dive.
The concern for evaluation
As we have discussed many times, the fact that a stock is down substantially does not make it a buy. This market, in which so many stocks fell 50% and then 50% (or more), taught that painful lesson to many investors.
And it should be noted that, even down 50%, NKE stock at first glance does not look so cheap. Shares are still trading at around 23 times past 12-month earnings. And those last four quarters include the end of calendar year 2021, when consumer spending on goods was still on the rise.
Given that profits were down 20% year-over-year in the first quarter and Nike’s 44% increase in inventory suggests a few quarters of reduced margins, fiscal year 2023 numbers could be worse. It’s certainly possible that investors getting “cheap” NKE after this drop will still pay something like 25 times this year’s earnings, if not more, in the process.
That’s a decent multiple, admittedly. In fact, that’s roughly where NKE traded in 2016 and 2017. But that’s not necessarily a multiple that suggests NKE is absurdly cheap. On the contrary, fundamentally, it seems that investors could have been too optimistic a year ago, rather than being too pessimistic now.
The case of NKE shares
But looking a little closer, there is a strong case for owning NKE stock here. The market actually repriced NKE shares before the pandemic. At the start of 2020, NKE was trading for around 35 times its 12-month earnings. Investors were optimistic about the company’s innovation and the potential of its direct-to-consumer business.
In the long run, there’s a simple question to ask: why doesn’t the same bull deal hold now? Yes, Nike faces short-term challenges. But, at least by management, its innovation remains relevant: During the first-quarter earnings call, executives spoke poetically of the “futuristic” Forward material, as well as a number of different footwear products. . The DTC business has grown well during the pandemic, and Nike will retain at least some of the acquired customers for the long term.
The competition remains in the rearview mirror. Adidas (OTC:)) stock is at its lowest in six years and Under Armor (NYSE:) is at its lowest since 2011. As a company, Nike looks pretty much like it was three years ago, but with a few potentially tough quarters ahead.
Take the long term
Certainly, one thing has certainly changed: . This change in turn affects the valuation calculation around a stock like NKE. In 2019, investors were willing to pay more for the safety of Nike’s earnings at a time when US government bonds offered a lower yield than they currently do.
But, again, relative to earnings (whether retrospective or forward-looking, even assuming Wall Street estimates for this year drop), NKE shares are cheaper. In fact, it’s also cheaper in absolute terms: stocks are down 18% since the start of 2020. Both factors factor in to some extent the end of the so-called TINA environment (there is no alternative) for US stocks.
Personally, it would be nice to see Nike stocks get even cheaper. In this market, it is certainly possible. Still, there are reasonable arguments for investors who still believe it’s one of the great companies in the world. After all, that’s what the market as a whole believed just a few years ago. If and when that confidence returns, Nike stock should return to its old ways.
Disclaimer: At the time of this writing, Vince Martin has no position in the securities mentioned.