Nike Inc. (NKE) The share price has seen a good run over the past 18 months and the stock is now trading more than 60% higher than its pre-Covid levels. The company’s performance during this period has been much better than that of its peers Adidas (OTCQX:ADDYY) and Skechers (SKX) as well as the larger S&P500 (TO SPY). The roots of the company’s recent outperformance date back to fiscal 2018, when the company began implementing its Consumer Direct Offense and Triple Double strategy. At its Investor Day in October 2017, the company unveiled this strategy to further strengthen its leadership position and drive long-term, sustainable and profitable growth.
With the Consumer Direct Offense and Triple Double strategy, the company intended to serve its consumer faster and more personally on a large scale. The Triple Double strategy was to add resources in three key areas of the business – innovation, speed and direct sales – to double their impact. For example, the company used to generate about 15% of its sales from digital platforms in 2017. On its investor day that year, it set a goal to increase digital revenue. to around 30% of total sales by FY22. The company was really well positioned for digital transformation through these efforts and when the Covid-19 related shutdown hit the business and retail stores from its competitors, it effortlessly shifted to online sales and gained significant market share.
Building on the success of its strategy, the company announced in June 2020 a new digital phase of the Consumer Direct Offense strategy: Consumer Direct Acceleration. This strategic acceleration will focus on three specific areas:
- Creating the market of the future through more premium, consistent, and seamless customer experiences that more closely match what consumers want and need.
- Align product creation and category organizations around a new consumer construct focused on men, women and children.
- Unify investments in data and analytics, demand sensing, information gathering, inventory management, and other areas on an end-to-end technology foundation to accelerate digital business transformation.
The company also recently provided a fiscal 2025 outlook that includes high-single-digit to low-double-digit revenue growth; gross margins in the 40s; EBIT margin in high adolescence; and diluted earnings-per-share growth in mid-to-high teens. This indicates that management is confident that Nike has significant room for growth in the future.
Will Nike stock go up?
Nike is currently trading at ~$167. It has experienced great volatility over the past 18 months. The stock was trading above $100 before Covid-19 crashed and it corrected to the 60s low in March 2020. However, it fully recovered in June 2020 and continued to rise. increase as the company was able to take advantage of its strong digital presence to gain market share. The digital trend is still strong. On its most recent earnings call, management noted that while physical retail reopened, it continued to see strong growth from NIKE Digital with revenue up approximately 37% year-over-year in the fourth quarter. The trends were even stronger in North America with NIKE Digital sales up around 50% year-on-year in that geography. The company’s digital initiatives lead to increased membership and a deeper connection with consumers, proving to be a compelling driver of engagement and repeat purchase across digital and physical retail platforms . This is reflected in the increase in average order value and purchase frequency. The company now has more than 300 million NIKE members and, more importantly, growth in member purchases is outpacing growth in new members, signaling increased engagement from existing members.
In addition to strong digital growth, the company should benefit from structural tailwinds such as the return to sport and a continued shift in consumer behavior towards health and wellness activities. The company’s women’s business (up 22% YoY) and Jordan Brand (up ~31% YoY) are also expected to generate strong momentum. Thus, Nike’s growth is expected to accelerate in the future.
Looking at Nike’s current valuation, it is trading at a forward P/E of around 38x, which is well above its five-year average forward P/E of around 31.54x. However, the company’s growth rate has also accelerated from what we have seen from fiscal year 2017 to fiscal year 2021. Over the past four fiscal years, the company has recorded a CAGR of approximately 6.7% for revenue and a CAGR of around 9.1% for EPS. However, over the next four years, revenue growth is expected to accelerate to the high-single-digit/low-double-digit range, while EPS growth is expected to be in the mid-to-high range.
Thus, the company’s higher valuations relative to its historical range can be justified on the basis of the accelerating trend in its revenue and earnings. Interestingly, we are still in the initial stages of this acceleration and this high rate of growth is expected to continue over the next few years as the company’s digital and other initiatives continue to grow. to implant. So, I think there is a good chance that the stock will continue its upward trajectory. Its P/E multiple may not increase any further, but the strong EPS growth should continue to drive the stock higher.
Can Nike stock reach $200?
If we take a three-year mid-term view and assume that by the middle of calendar year 2024, Nike’s forward P/E multiple will return to its 5-year average range of approximately 31.54x, we get a price target of $215 using the EPS consensus estimate of $6.83.
However, if you look at the consensus estimates, the revenue growth assumptions are in the high single digits for fiscal 2023, 2024, and 2025. The company has released better than expected results in the recent past, beating its previous targets for the day. investors. So I think it’s not unfair to assume that the company’s annual revenue growth over the period from fiscal year 2023 to fiscal year 2025 may be in the low double-digit range, which corresponds to the upper end of its orientation range. If we assume a CAGR of around 12% between FY2022 and FY2025, FY2025 revenue will be north of around $70 billion, about 6% better than consensus estimates. A similar improvement in EPS will give us EPS of around $7.25, which gives a target price of $228 using a P/E multiple of 31.54x. [Note: The improvement in EPS should be higher because of operating leverage, but I am just being conservative here].
We can also say that the company’s strong growth momentum will continue well beyond 2025 and that the stock will continue to trade near around 38 times the C/E multiple it currently earns. Using ~$7.25 in FY2025 EPS, we get a target price of around $275 in this scenario.
So there is a reasonable chance that the stock will trade north of $200 if you have a medium-term view.
If we look at the Wall Street ratings, sell-side analysts are overwhelmingly bullish on the company. The stock’s average target price is $183.24, with the lowest being $130 and the highest being $220.
I think that sell-side analysts adopt a relatively short-term view (1 year) while giving their price target, which explains why their range is lower than mine. While the stock’s average target price and high target price may be justified, I don’t think there is a plausible scenario for the stock to return to the $130 price level, which is the lower end of the street price target range.
Is the NKE share a buy or a sell?
Despite its recent outperformance, I think Nike is a good buy for long-term investors. If the company is able to reach even the revenue midpoint and EPS target it has set, the stock may trade at around $215 over the next three years, implying a increase of about 30%. If the company does better and reaches the top of its guidance range and the momentum continues beyond 2025, we can see it trading at much higher levels.
Usually, when a company is performing well and has a leading position in its industry, it generates more cash from its operations than its peers. She can use that money to reinvest in her business to drive growth, innovation, and better serve her customers, making it harder to catch up with her competitors. This virtuous circle, a company using more cash to improve its offerings, and an improved offering resulting in increased sales and more operating cash flow, gives the company a very strong strategic advantage. I believe Nike has this advantage which will result in continued market share gains above the industry growth rate. This is a very attractive setup for long-term investors. Therefore, I think the stock is a good buy at current levels.