It didn’t take long for shares of Nike (NKE) to bounce back after its nearly 17% correction, induced primarily by supply chain issues in Vietnam.
Many Vietnamese workers are reluctantly heading back to work after a brutal COVID-19 lockdown. With immense unmet demand being built up for various Nike products, most notably sneakers, the company is likely to get more relief in coming quarters, as the worst of its supply chain woes begin to fall into the rear-view mirror.
Although Southeast Asia is already in the process of coming back from a brutal wave of closures, Nike stock appears to have bounced back a tad too quickly. While Nike has the green light to ramp up production, it will definitely be harder to get some workers to return without substantial wage hikes.
Sure, supply is likely to catch up with demand over the near term, but the medium to long-term outlook still seems hazy as long as the coronavirus is out there. Pandemic risks are still very much in play. As such, investors in Nike may wish to do a bit of profit-taking, as the price of admission has become quite frothy, and COVID-19 risks may be discounted.
For these reasons, I am changing my stance on NKE stock to neutral. (See Analysts’ Top Stocks on TipRanks)
COVID-19 Supply Chain Woes Ease, but Could Worsen Again
It’s comforting for investors to dismiss COVID-19 risks. America has been reopening its doors in recent months, after all. We’ve gotten a taste of normality, and it’s going to be tough to transition back into a lockdown, even with a more virulent strain whose spread can only be curbed with lockdowns.
Still, one should not discount the odds that another variant of concern (VoC) could spark another wave of profound economic disruptions. Like those experienced by Nike prior quarters, supply chain issues could easily happen again in the new year. That said, firms will find ways to adapt and embrace new supply-chain technologies, such as scenario simulations that could help dampen future impacts of COVID-induced supply chain disruptions.
For now, Nike is looking to ramp up on hiring furiously as Vietnam’s wave winds down. The company will likely have to loosen up its purse strings, as the great labor shortage, or “The Great Resignation of 2021,” also looks to be impacting Vietnam, with many workers weighing the risks of returning to work between waves.
Ramping Up on Production
Nike suppliers in Vietnam have reportedly turned to job fairs and have been luring in workers with mere $100 bonuses. Undoubtedly, suppliers may have to sweeten up the pot considerably if Nike is going to ramp up production to have supply meet the demand for coming quarters.
Fortunately, Nike is stepping up to the plate, with considerable investments in Vietnam to make up for lost time. Despite such investments, there’s only so much one can do when lockdowns cause national factory closures. In any case, scenario simulations could allow Nike to reduce future supply/demand imbalances caused by multi-week shutdowns.
For now, Nike seems to be on better footing and is unlikely to stumble as drastically as it did just a few months ago when shares nearly flirted with bear market territory.
Wall Street’s Take
Turning to Wall Street, Nike has a Strong Buy consensus rating, based on 17 Buys and three Holds assigned in the past three months. The average Nike price target of $181.53 implies 3.2% upside potential.
Analyst price targets range from a low of $160 per share to a high of $213 per share.
The Bottom Line on NKE Stock
The real challenge for Nike is if its subcontractors can retain workers, given that the risks have now been drastically raised.
Nobody wants to run the risk of contracting COVID-19. Bonuses and modest pay hikes may or may not be enough to do the trick. Regardless, Nike stock seems a tad too rich at 46.4 times trailing earnings for my liking despite recent production ramp-up efforts.
Disclosure: Joey Frenette doesn’t own shares of any mentioned companies at the time of publication.
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