I am neutral on Nike (NKE) because Wall Street’s bullishness on the stock and its strong business model are offset by its significantly above-average valuation multiples. (See Analysts’ Top Stocks on TipRanks)
Nike is one of the leading designers and marketers of athletic footwear, athleisure wear, accessories, and equipment suitable for a wide variety of sporting, health, and fitness activities. The company’s wholly owned subsidiary, Converse, also designs and distributes Nike’s products.
Strengths
Nike was founded on the principle that it would make shoes for anyone who could walk. The company has been operating as a “can do” company since its inception.
Nike has one of the strongest brand images in the world, which is based on high-quality products. The company is also involved in the rapid innovation of cutting-edge designs for athletic footwear, apparel, and equipment.
In addition, Nike also boasts a diverse portfolio that includes Converse, as well as other sub-brands, including Nike Blazers, Nike Tiempo, and Nike Shox.
Recent Results
In its first-quarter 2022 fiscal report, Nike announced revenue of $12.2 billion, up 16% year-over-year. In contrast, revenue was up 12% on a currency-neutral basis.
Revenue for the Nike Brand was calculated at $11.6 billion, showing an increase of 12% year-over-year while Converse’s revenue was reported at $629 million, an increase of 7%. Nike Direct sales also saw sales of $4.7 billion, indicating an increase of 28%. In addition, the brand’s digital sales also increased by 29%.
The company’s diluted earnings per share grew 22% year-over-year to $1.16. Nike’s selling and administration expenses increased to $3.6 billion, up 20%. It also saw a 36% increase in demand creation expenses. The increase was chiefly driven by the normalization of spending in advertising campaigns and continued digital marketing investments to support higher demand.
Nike’s net income was $1.9 billion while its cash and cash equivalents and short-term investments showed an increase of $4.2 billion from last year, resulting in $13.7 billion. This increase was attributed to strong free cash flow, partially offset by cash dividends and the repurchase of shares.
Valuation Metrics
Nike’s stock looks quite expensive at the moment as its EV/EBITDA, price-to-normalized earnings, and price-to-free cash flow ratios are all well above its five-year averages.
Its EV/EBITDA ratio is 31.1x compared to its five-year average of 22.4x. In addition, its price-to-normalized-earnings ratio is 42.6x, versus its five-year average of 31x. Lastly, its price-to-free cash flow ratio is 62.5x, compared to its five-year average of 36.1x.
Wall Street’s Take
From Wall Street analysts, Nike earns a Strong Buy consensus rating based on 18 Buys and three Holds assigned in the past three months. Additionally, the average Nike price target of $182.20 implies 11.5% upside potential.
Summary and Conclusion
Nike is a great company thanks to its stellar balance sheet, world-class brand power, economies of scale, innovative capabilities, and strong profitability. Furthermore, Wall Street analysts are overwhelmingly bullish, and their price targets indicate that decent upside remains over the next year.
However, the company’s valuation multiples are currently sitting at levels that are well above their historical averages. This implies that the stock could be overvalued.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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