Why Nike Stock Looks Fairly Priced At $90

Despite almost a 13% decline in Nike (NYSE: NKE) stock since the beginning of this year, we believe that Nike’s stock looks fairly priced at the current price of $90 per share. Although Nike’s stock is still 22% higher than it was at the beginning of 2019 and over 46% higher than it was at the starting of 2018, a little over two years ago, Nike’s strong fundamentals, digital penetration, and geographical diversification means that the stock is appropriately priced at its current levels. Our dashboard, ‘What Factors Drove 46.4% Change In Nike Stock Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

Some of the stock price rise of the last 2 years is justified by the roughly 13.9% growth seen in Nike’s revenues from $34.4 billion in 2017 to $39.1 billion in 2019. This rise was partially mitigated by a 200 basis points contraction in net income margin from 12.3% in 2017 to 10.3% in 2019. However, share repurchases worth $8.5 billion made during this time period helped in a 4.7% reduction in share count, resulting in earnings per share remaining flat over 2017-2019. Notably, Nike  has about $3.2 billion in cash and cash equivalents as of the last report, and the company will very likely continue to buy back shares as it still has around $11 billion remaining under its share repurchase program.

Finally, Nike’s P/E multiple grew from 23.8x at the end of 2017 to 39.6x by the end of 2019. While Nike’s P/E is down to about 35x now, given the volatility of the current situation, Nike’s P/E has witnessed a growth of 47% from December 2017 to April 2020. We believe that the company’s current multiple is appropriate when compared to levels seen over recent years – P/E of 39x at the end of 2019, and 61x as recent as in late 2018 (P/E multiple was unusually high in 2018 due to lower EPS, resulting from the changes in the corporate tax rate).

How Is Coronavirus Impacting Nike’s Stock?

The Coronavirus crisis has hit the apparel industry hard. The companies have had to temporarily shutter their stores and it remains unclear as to when they can open them again, as the pandemic continues to spread, particularly in Europe and the U.S., which are the largest markets for apparel companies. The decline has been exacerbated by the cancellation of major sporting events, including the Olympics, NBA, and Euro 2020, that form a decent part of the company’s top line. However, Nike is uniquely placed in the apparel industry. Nike’s strong digital presence and geographical reach have helped the company carve a niche position in the apparel market. Nike’s products are sold across the globe while it has a well-developed digital channel in more than 45 countries. Additionally, Nike’s activity apps have increased user engagement and provided a boost to the company’s digital sales. Despite the outbreak of coronavirus, Nike’s digital business grew 30% in China in Q3 2020 (ending February). Nike’s China retail business has also gained steam, as the company has reopened all its stores in China. Notably, China is Nike’s fastest-growing and most profitable segment.

In conclusion, Nike’s revenues are likely to witness a decline in FY2020 (ending May) but Nike’s diversified business model and strong digital presence places the company in a much better position as compared to its peers. Moreover, Nike has ample cash reserves to face the repercussion of the outbreak, if the situation worsens. On the contrary, if there are early signs of abatement of the crisis, the company’s stock could see a modest uptick. Going by the recent trends, we believe that the company’s stock is currently fairly priced and offers limited upside returns.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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