Nike (NKE) investors have had a tough 2022, as NKE is down around 31% year-to-date. Though the name seems en route for those June lows near $100 per share on the back of recent analyst downgrades, I think that’s too much recession risk baked into the stock. In the end, Nike’s powerful brand will shine through and help lead the markets out of this recession. Thus, I’m changing my tune on Nike to bullish after the recent weakness in the stock.
Nike Stock Slapped with Another Downgrade
Despite Nike’s incredible brand, it will not be immune from a downfall in demand for discretionary goods once a recession or economic slowdown arrives. Discretionaries like Nike tend to be the canaries in the coal mine. The latest downgrade from BNP Paribas cited uncertainties relating to “China’s recovery” and the potential for inventory issues down the road.
Undoubtedly, Nike was hit with serious supply-side challenges since the COVID-19 pandemic began. Demand stayed incredibly strong, and the resale market (comprised of firms like StockX and Goat) was alive and well. As Nike gets past supply issues, demand could wane in a big way as consumers focus on necessities like rent and food over those nice-to-have “kicks” from Nike.
Further, as demand in the Chinese market remains sluggish, Nike may have to resort to discounting, which would negatively impact the firm’s margins. Indeed, the “bullwhip effect” may give shares of Nike a bit of whiplash going into year’s end.
In any case, I think investors overreacted to the latest downgrade. Nike’s powerful brand will help it retain impressive margins over rivals. Its intriguing app and impressive direct-to-consumer (DTC) platform could help the firm navigate a choppier environment and provide an upward boost on its margins.
Nike Stock is Likely to be a Value Play
Nike is a tough stock to own for the faint of heart, especially at this time. With a recession on the horizon and so much in the way of COVID-related uncertainties, it’s tough to tell if the recent slip has produced a dip worth buying or if it’s the beginning of a much harder fall. In prior recessions, Nike’s slips and falls have been rather hard. Nevertheless, pending a severe recession, I view Nike stock as more of a value play.
Indeed, it may be quick to rally once the market is finished worrying about the coming period of economic contraction. It’s possible that when we’re in a recession (I don’t think we’re in one now, given the robust jobs report), the beaten-down discretionary stocks may finally be ready to push higher.
At the time of writing, Nike stock trades at 30 times trailing earnings, 3.9 times sales, and 11.6 times book value, all of which are slightly ahead of the footwear industry averages of 28.7, 3.6, and 10.8, respectively.
Seeing as Nike’s brand is head and shoulders above the competition, I’d argue that a much richer premium to the peer group is warranted. Nike isn’t just another sporty retail play; it arguably has one of the most influential brands in America today. Further, this powerful brand will help the firm get back on the growth track in China once it’s ready for its next bull market.
Don’t Discount Nike’s Phenomenal Omnichannel Push
Though the playing field has been leveled on the e-commerce front in recent years, it’s tough to visualize an up-and-comer taking meaningful share away from the firm. Nike isn’t a luxury brand by any stretch of the imagination (perhaps it’s an “affordable luxury”). Still, it can command above-average prices without destroying too much demand, especially as it kicks its omnichannel investments into high gear.
As the company continues spending on its e-commerce channel while boosting its physical presence, it stands to bolster its margins further as Nike looks to cut middlemen — think Footlocker (FL) — out of every sale.
Nike’s omnichannel expansion has gone incredibly well, and it’s likely still in its very early innings. By cutting out other retailers, Nike will be able to keep more of each sale to itself. When times are good and demand is hot, Nike will enjoy a solid margin boost. However, when times get more challenging, Nike can mark down various pieces of inventory without having to take too hard a hit to the chin.
Undoubtedly, Nike’s flagship brick-and-mortar and e-commerce stores allow the firm more pricing flexibility. Going into the next recession, Nike’s omnichannel push could help it avoid a longer-lived implosion like the one suffered during the 2008 stock market crash.
In short, Nike is a better version of itself in 2022, with many margin-enhancing tailwinds still in effect. While such tailwinds will be dampened by macro headwinds, I think many are discounting the firm’s ability to withstand a mild-to-moderate economic contraction.
Yes, inventory could swell, but markdowns are likely to be as short-lived as the next recession.
Is NKE a Good Stock to Buy Now?
Turning to Wall Street, NKE has a Moderate Buy consensus rating based on 16 Buys, 10 Holds, and one Sell assigned in the past three months. The average NKE price target of $128.87 implies 12.6% upside potential. Analyst price targets range from a low of $100 per share to a high of $156 per share.
Takeaway – NKE Stock is Worth Considering
Nike is a great company with a powerful brand and strong secular tailwinds that will help it recover out of this recession-driven pullback with a fury. Though analyst downgrades will cause many to sour on the stock, I think the brand and exceptional omnichannel performance are enough to consider putting one’s contrarian hat on.