Shares of footwear giant Nike (NKE) are trying to stage a comeback after a peak-to-trough drop that saw it lose more than a third of its value.
Although Nike has one of the strongest brands on the planet, with considerable pricing power to weather the recent inflation storm, its stretched valuation could further limit the upside. Add to the equation the growing odds of a 2023 economic recession, and Nike stock could struggle to regain its footing.
The company’s management team has done an incredible job of overcoming supply chain challenges over the past year.
Demand for premium footwear and other athletic apparel has been remarkably robust, even with supply constraints that Nike expects to overcome.
This bodes very well for a consumer discretionary company like Nike. Still, questions remain about the state of mind of the consumer in a few quarters.
For now, I’m bearish, as I think the rich valuation doesn’t fully account for potential medium-term risks.
Is Netflix a harbinger?
Netflix (NFLX) got a rude awakening, with subscribers hitting that undo button, prompting one of the worst sales in Netflix history.
It can be said that Nike has much better purchasing power on its high-end shoes and other apparel. In fact, some of Nike’s most expensive sneakers, many of which have a cult following, may be in even higher demand as Nike gradually raises prices across the board.
Still, Netflix’s drop in subscribers has raised consumer health concerns. Was the recent deluge of subscription cancellations a problem for Netflix? Or does it indicate the consumer’s declining health?
The first scenario seems likely, given that Netflix management may have done more than its fair share of missteps. Still, this latest scenario is worrying for consumer discretionary games, including Nike.
Inflation is taking up more and more space in our wallets, and with a potential recession to worry about, it’s no mystery why some might cut spending on ‘wellness’. .
As more quarters are revealed, we will have a better idea of the consumer. For now, it’s clear that consumers are resisting the effects of inflation, and naturally they’ll gravitate towards better value offerings in a competitive market.
Luckily for Nike, it seems to have a much wider moat, thanks to its powerful brand. This mark can help Nike weather a bumpy inflationary end to 2022.
Nike continues to fire on all cylinders
Although the shoe arena is increasingly competitive, with main rival Lululemon (LULU) looking to get in on the action, I think Nike shareholders don’t have to sleep on a major share loss.
On the contrary, Nike’s incredibly strong direct-to-consumer (DTC) presence could pave the way for the company’s future involvement. Indeed, Nike’s digital strategy has paid off.
As the company invests more in the digital experience, consumer demand could really increase in the next phase of the market cycle.
Nike continues to fire on all cylinders. For a retailer, it does almost everything right on the digital front. Still, the valuation appears to be stretched, with NKE shares trading at around $132 per share. The stock is trading at a frothy 35.8 times earnings at such a price.
Additionally, Nike’s high multiple could ease as investors abandon growth and high price-to-earnings (P/E) multiples for value plays with high dividends to improve their odds of beating the market. inflation and end the year with a positive real return.
As investors factor in the growing odds of a recession, Nike could risk sliding to its 52-week lows just before the $117 mark. Discretionary businesses tend to take a big hit in the chin when the consumer is forced to cut back on spending, starting with “needs” like the latest Jordan sneakers.
The Taking of Wall Street
According to TipRanks, NKE shares are a strong buy. Out of 24 analyst ratings, there are 18 buy recommendations and six hold recommendations.
Nike’s average price target is $166.09, implying an upside potential of 25.2%. Analyst price targets range from a low of $140 per share to a high of $195 per share.
Conclusion on Nike shares
In the long term, Nike’s innovation efforts will put upward pressure on margins. With a growth streak in the Chinese market, which is experiencing a burgeoning middle class, Nike’s long-term growth story still looks bright.
Unfortunately, there will be no shortage of near-term potholes en route to higher levels, especially if the consumer isn’t as robust as most bulls think.
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