Nike Stock (NYSE:NKE): Compelling value after historic plunge

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Nike Apparel Pivot Stocks (NYSE: NKE) have been battered this year, down 46% since the start of the year. This is an excessive drop for any Dow Jones Industrial Average (DJIA) component, not to mention the best blue chips in the basket. Indeed, analysts are worried about the inventory glut and its effect on margins in the future. With a tough quarter in the rearview mirror, a recession looming and significant negative momentum behind NKE shares, it’s hard to go against the grain. Still, I think there’s a lot of value to be had for dip buyers brave enough to “just do it”.

I remain bullish on Nike shares as they are down almost 50% from their highs. It can be difficult to see past the looming headwinds, but the longer-term fundamentals are still intact.

Inventory markdowns can erode margins in the short term. That said, once conditions inevitably normalize, the focus will once again be on expanding the margins to be gained from the company’s direct-to-consumer (DTC) strategy. Unlike the inventory glut, Nike’s DTC push and increased brand affinity will have a lasting effect on margins.

Nike Stock: Analysts Downgrade on Inventory Bloat

Analysts’ downgrades came soon after Nike’s for the first quarter of fiscal 2023. Although the quarterly numbers themselves weren’t terrible, with earnings per share are $0.93a penny ahead of the consensus estimate, it was his inventory that caused many to sound the alarm.

As shown above, Nike’s inventory jumped 44% in the last quarter, raising fears that more price cuts could be considered in the coming quarters. Undoubtedly, recessions don’t bode well for the demand for nice goods like clothes and shoes. Although Nike has an unrivaled brand, it’s hard to resist the gravitational pull of an industry that’s among the most vulnerable to down economic cycles.

Nike’s inventory jump didn’t just pave the way for slight downgrades; many Wall Street analysts have lowered their price targets by more than 20%. Some have reduced their buy recommendations to hold, although most have retained their ratings despite the magnitude of the price cuts.

Baird recently lowered his Nike stock price target to $100 from $127 — a significant trim. Barclays also cut its price target to $83 from $110, noting similar headwinds.

The inventory glut is expected to put considerable pressure on margins. However, it looks like Nike shares are already priced on the cusp of a recession. Additionally, ongoing supply chain issues and macro risks already appear priced in to the stock price, with Nike trading below $100 per share.

At the time of writing, Nike stock is trading at a very modest 3.2x sales and 25.6x trailing earnings. Indeed, Nike is rarely so cheap. Even with a “mild” downturn on the horizon, I think the market is overemphasizing recent headwinds that I view as transitory.

Nike has tools to offset headwinds from the margin ahead

Headwinds at the margins are scary, but they don’t have to be for a company like Nike, which has enviable brand power. While DTC’s ongoing efforts are unlikely to compensate for headwinds on margins, I think the mitigation of supply chain issues and its mobile app can help make a small difference.

The mobile app, in particular, helps Nike better connect with its loyal fanbase. Without a doubt, special edition sneaker releases (or releases) with unique colorways are the main reasons to download the Nike app. Its fitness service and other intriguing benefits are other reasons to stay in the Nike ecosystem.

Nike’s “Triple Double” strategy of doubling down on innovation, speed and direct connections has paid off. As we enter a more difficult macroeconomic climate, these are direct connections that can help Nike limit the pressure pain that accompanies inventory markdowns.

Cash-strapped consumers may not have so much money to splurge on the latest and greatest sneakers. However, Nike may offer “special discounts” to its users to keep them engaged. If Nike is going to offer discounts on items anyway, it might as well improve one of the three pillars (direct connections) of its Triple Double strategy.

If Nike plays its cards right, it can reduce inventory while minimizing margin pressures and strengthening its three “Triple Double” pillars of growth.

Is Nike a good stock to invest in?

Analysts seem to like NKE stock, giving it a moderate buy rating. This is based on 16 purchases and 10 blocks attributed over the past three months.

Nike’s average price target is $110.83, implying an upside potential of 22.8%. Analyst price targets range from a low of $79.00 per share to a high of $185.00 per share.

Conclusion: management can weather the coming storm

I think analysts were too quick to lower the bar for Nike stocks. There is no easy way around the headwinds of the margin. However, in the long run, there’s no reason why the company can’t come out of this down cycle smarter and stronger.

Disclosure

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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