Is Nike Stock Attractive Even After A 40% Rally?

Despite an almost 40% rise since the beginning of 2020, at the current price of around $142 per share, we believe Nike’s stock (NYSE: NKE) still has more to go. The company designs, develops, and markets footwear, apparel, equipment, and accessory products. Even when Nike was faced with the temporary closure of the majority of its global stores, the company managed to post revenues of $38.2 Bil for the last 4 quarters, down 6% from the consolidated figure of $40.8 Bil for the 4-quarter period before that. In addition, Nike has added more than 70 million new members worldwide since the start of the coronavirus pandemic. Although we believe the company remains fundamentally overvalued, trading at about 47x consensus 2021 earnings, Nike has momentum on its side, and there could be room for more gains in the stock. Nike has shown that it still has what it takes to grow – with revenue for the six months of fiscal 2021 (ending May 2021) jumping 4% year-over-year (y-o-y), while net income increased 12% y-o-y.

Nike’s stock is already about 96% higher than it was at the end of FY 2018 (ended May). Our dashboard, What Factors Drove 96% Change in Nike’s Stock Between FY 2018 and Now?, provides the key numbers behind our thinking, and we explain more below.

Some of the rise in stock price of the last 2 years is justified by the roughly 3% growth seen in Nike’s revenues from $36.4 billion in FY 2018 (ended May 2020) 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 swell 37%.

Finally, Nike’s P/E multiple went from close to 60x at the end of FY 2018 to 32x by the end of FY 2019 and then grew back to around 61x at the end of FY 2020. While the company’s P/E has now increased to 86x, it seems to be overvalued when the current P/E is compared to levels seen in the past years. But still, the company’s stock will likely continue to gain further as it currently remains a favorite in the sports footwear and apparel category.

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So how has Coronavirus impacted the stock?

Nike is doing exceptionally well now thanks to its loyal customer base, unique product portfolio, digital infrastructure, and impressive gains in China. In fiscal Q2 (ended Nov 30), the company’s revenue increased 9% y-o-y and diluted earnings per share grew 11% y-o-y. The retailer found a dramatic shift in revenue generation from stores to e-commerce, as its direct-to-consumer segment increased by 84% y-o-y to account for more than 30% of total sales. In addition, the Greater China segment recorded 24% revenue growth and now represents 21% of Nike Brand revenue.

Nike is also committed to opening more stores to accelerate growth and provide a more digitally connected experience for customers. It announced plans to open 30 stores in the second half of fiscal 2021. The company’s management has also announced a 12% increase in its annual dividend to $1.10 per share, in line with its track record of raising dividends for 19 consecutive years.

While Nike stock is currently doing well despite a high valuation, 2020 has created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Amazon vs Etsy.

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