Nike stock remains stuck (NYSE:NKE)

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Investment thesis

Nike Stock (NYSE: NYSE: NKE) remains stable, after an impressive jump in recent days due to the results of the fourth quarter of 2021. The share price seems to have found some resistance in the price range of $ 160 plus or minus a jump in both directions. The stock has the potential to rise another 5% to $169. However, this next quarter will be more tumultuous and more difficult to bring sales back up. With more uncertainty in China following increased regulatory pressure and weaker growth prospects in North America, the next quarter for Nike may not live up to expectations.

Numbers

Nike had a quarter with strong revenue growth and an expanding Nike Direct business. However, Nike’s P/E remains high at 45 and has a negligible dividend yield of 0.68%. Much of the good news has already been priced into the stock, following the stock’s dramatic 15% rise after the earnings announcement. Return on assets was ahead of the competition at 16%, and debt to EBITDA is healthy at 1.2.

Nike and its competitors - Return of assets
Data by YCharts

The quick ratio is 1.8 and is superior to many other competitors in the industry. Nike has a gross profit margin below 44%, which is back to pre-pandemic lows. Over the years, Nike has never been able to achieve a 50% gross profit margin, which has been a struggle for the company. SG&A spending also fell slightly to $13 billion; SG&A is not a big deal for the company given that marketing is one of the key motivating factors for Nike. Nike’s price-to-book ratio is 19, indicating high valuations.

Nike and Competitors - Book Value Quotes
Data by YCharts

Currently, there is momentum on the side of Nike, however, the stock may have reached some price resistance at around $160-169. Nike wasn’t the only retailer to have had a strong quarter this time around. Most retailers were able to bounce back from renewed consumer interest and pent-up demand. Although Nike was able to take full advantage of the turnaround, however, in the third quarter of 2021 they struggled with declining demand in Asia and Europe, just as many other retailers suffered during this period in March 2021 When the market is on the side of a stock it is difficult, if not impossible, to go against the tide, but for now Nike may be near the end of its run and may face a recoil.

Valuation + Technical Indicators

Nike is a difficult company to value with fundamentals because the fundamentals are generally strong, making it difficult to calculate a good entry point. The fundamentals tell you that Nike is a great company, but the technical indicators help you find the best price. The RSI has made a huge spike and is near the top at 79, indicating extremely overbought levels. The price also recently increased from $133 to $159 in the month of June.

The 50-day SMA and the 200-day SMA of Nike went on a wild ride with the 50-day SMA crossing below the 200-day SMA for the first time since March 2020. The price in March 2020 was around $87. As the 50-day SMA once again broke above the 200-day, given the narrow length between the two, this could be interpreted as both a bullish and a bearish sign. This could be seen as a big leap forward for the stock, or the fact that the 50-day SMA has broken below the 200-day SMA could be assessed as a rare sign of weakness. Only a $3 difference remains between the two averages, however, on March 31, once the 50-day SMA crossed below the 200-day SMA, it did not turn around until July. This was not the case here, as the 50 days went below the 200 days one day and came back the next. Therefore, this may fall more on the bullish side of things, however, coupled with the overbought RSI levels, it may be best to leave the stock alone.

Nike 50 and 200 day moving average
Data by YCharts

Growth prospects

Nike saw significant growth in the fourth quarter, with the EMEA and APLA regions posting growth rates of 107% and 76% respectively (according to the earnings call), after disappointing third quarter sales with a decline in income in both regions at the time. Nike is likely to face more competition from more sustainable and ethical footwear and apparel manufacturers in the future. As consumer tastes change and adapt, this can create a new generation of more conscious shoppers. Also, how much more can Nike’s sales increase? Personal consumer spending (data from St. Louis FRED) is already above pre-pandemic levels, although the consumer is arguably in worse shape with more unemployment and stimulus ending soon for many consumers. In the last three months for which data was reported (March, April and May), spending barely budged with an increase of 0.9% between March and April and an increase of 0.018% from April to May . This sharp decline comes after a huge 5% increase from February to March 2021. Growth has slowed significantly and usually the first thing to cut is retail spending.

Personal consumption expenditure

(Source: St. Louis FRED)

Consumer sentiment is also down this month at 82.9, even falling below the March 2021 figures of 84.9. April retains the peak of 88.3. Consumer confidence has yet to recover to pre-pandemic levels, peaking at 101 in February 2020.

Consumer sentiment after the pandemic

(Source: St. Louis FRED)

In terms of gross retail sales, they have also been fairly stagnant. From March to April, sales decreased by -1.96% and from April to May, sales increased by 2.85%. Over the past three months, sales have barely budged, indicating a much tougher quarter for Nike in Q1 2022.

Retail Sales - Clothing and Clothing Accessories

(Source: St. Louis FRED)

China

Nike continues to have little competition in the sneaker space and has expanded globally. However, some knowledge of the Chinese market is necessary given the recent history and increasing pressure from the People’s Republic of China in all industries. The goals of this have included increased regulation on companies such as DiDi (DIDI) and Chinese education companies. Nike, which has already angered Chinese authorities, has the heightened threat of facing some level of action from the Chinese government, despite being an American company. Nike has a level of protection from the government, however, if they take action against the company, there’s not much they can object to. In fiscal 2020, the Greater China region accounted for 19% of total revenue, making China a visible weakness in the business. In the fourth quarter of 2021, revenues in China increased by 9%, in the previous quarter (Q3), revenues increased by 42%, a fairly marked slowdown in terms of sales.

Conclusion

Nike is a good stock to own, however, future growth prospects appear lower than in previous quarters. Demand at the moment seems to be flat, and with growing pressure in China, it may not be wise to get into Nike at these prices. The stock is already moving higher, indicating a sell target of $169 and a buy target of $145. A buy target of $145 would mean a decline of around 10% for the stock. Therefore, I recommend a hold rating on the stock as it may be difficult to meet expectations in the next quarter.

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