Despite up almost 40% since the start of 2020, at the current price of about $142 per share, we believe that Nike (NYSE:NKE) shares are still has more to do. The company designs, develops and markets footwear, clothing, equipment and accessories. Even when Nike faced the temporary closure of the majority of its global stores, the company managed to post revenue of $38.2 billion for the last 4 quarters, down 6% from the consolidated figure of $40.8 billion for the 4 quarter period before that. . Additionally, Nike has added more than 70 million new members worldwide since the start of the coronavirus pandemic. Although we believe the company remains fundamentally overvalued, trading at around 47x consensus 2021 earnings, Nike has momentum on its side, and there could be room for more gains in the stock. Nike showed it still has what it takes to grow – with revenue for the six months of fiscal 2021 (ending May 2021) jumping 4% year-over-year (yoy), while net income increased 12% year-over-year.
Nike’s stock is already around 96% higher than it was at the end of fiscal 2018 (end May). Our dashboard, What factors led to a 96% change in Nike’s stock from fiscal year 2018 to today?, provides the key numbers behind our thinking, and we explain more below.
Part of the rise in stock prices over the past 2 years is justified by the growth of around 3% observed in Nike’s income from $36.4 billion in fiscal year 2018 (ended May 2020) to $37.4 billion in fiscal year 2020. This, combined with a 1.3x increase in profit margin from 5.3% in 2018 to 6.8% in 2020 and a 4% reduction in the number of shares due to share buybacks worth $11.6 billion, pushed the earnings per share of 37%.
Finally, Nike’s P/E multiple fell from nearly 60x at the end of fiscal 2018 to 32x at the end of fiscal 2019, then recovered to around 61x at the end of fiscal 2020. While the company’s P/E has now risen to 86x, it seems to be overrated when the current P/E is compared to levels seen in recent years. Nonetheless, the company’s stock will likely continue to rise as it currently remains a favorite in the athletic footwear and apparel category.
So how has the coronavirus impacted the stock?
Nike is doing exceptionally well now thanks to its loyal customer base, unique product portfolio, digital infrastructure and impressive gains in China. During the fiscal second quarter (ended Nov. 30), the company’s revenue increased 9% year-over-year and diluted earnings per share increased 11% year-over-year. The retailer has seen a dramatic shift in revenue generation from stores to e-commerce, with its direct-to-consumer segment growing 84% year-on-year to account for more than 30% of total sales. Additionally, the Greater China segment saw revenue growth of 24% and now accounts for 21% of Nike brand revenue.
Nike has also pledged to open more stores to accelerate growth and provide a more digitally connected experience for customers. It announced plans to open 30 stores in the second half of fiscal 2021. Company management also announced a 12% increase in its annual dividend to $1.10 per share, consistent with its historical increase in dividends for 19 consecutive years.
While Nike stock is currently doing well despite a high valuation, 2020 has created many price discontinuities that can provide interesting trading opportunities. For example, you’ll be surprised how counter-intuitive stock valuation is to Amazon versus Etsy.
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