Nike: A Fully Valued Stock?

by Trefis Team
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Despite a 57% rise since the March 23 lows of this year, at the current price around $98 per share we believe Nike Stock (NYSE: NKE) has reached its near term potential. Nike stock has rallied from $63 to $98 off the recent bottom compared to the S&P which moved 45% over the same time period.  Gradual store openings, as well as Nike’s strong digital sales, which grew a whopping 75% in Q4 2020 (ending May), has helped the stock beat overall markets. Moreover, the stock is up 62% from levels seen in early 2018, over two years ago. Nike’s stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, demand and revenues will likely be lower this year than last year. Our dashboard ‘Why Nike Stock moved 62%‘ 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 3% growth seen in Nike’s revenues from $36.4 billion in FY2018 (ending May) to $37.4 billion in FY2020. This combined with a 1.3x jump in net income margin from 5.3% in 2018 to 6.8% in 2020 and a 4% reduction in share count due to stock repurchases worth $11.6 billion helped earnings per share basis swell 37%. Finally, Nike’s P/E multiple grew from 51x at the end of 2017 to 62x by the end of 2019.  While the company’s P/E has now decreased to 60x, it seems appropriately priced, when the current P/E is compared to levels seen in the past years. P/E of 62x at the end of 2019 and 51x as recent as late 2017. We believe the stock is fairly valued and is unlikely to see a significant upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak. 

How Is Coronavirus Impacting Nike’s Stock?

The Coronavirus crisis has hit the apparel industry hard. Fading consumer demand, reduced discretionary spending, and stay-at-home orders resulting in stores remaining closed, continue to take their toll on the apparel industry. This decline has been exacerbated by the cancellation of major sporting events, including the Olympics, NBA, and Euro 2020, that form a decent part of Nike’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. Notably, Nike’s digital sales increased 75% in the fourth quarter led by double-digit increases across all geographies and was approximately 30% of total revenue, partially offsetting the impact of Covid-19 on the company’s top-line. Moreover, the company stated that it has reopened 90% of its stores and expects its business to return to growth in the second half of FY’2021. To sum things up, although Nike is likely to return to growth in FY’21, the company’s stock looks fairly valued as of now.


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