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Will Nike’s Solid Pipeline Just Do it For its Stock in FY23?
Stock Analysis & Ideas

Will Nike’s Solid Pipeline Just Do it For its Stock in FY23?

The world’s largest athletic shoes and apparel maker, Nike (NYSE: NYE) is gaining strength after it reported upbeat fiscal Q3 results. Shares have gained 7.5% in the last two days, recovering from its downward trend over the last couple of weeks.

Strong Pipeline in FY2023

Nike expects to return to strong growth in FY23 on the back of strong demand, a much-awaited product innovation pipeline globally, as well as expected normalization of inventory. 

Nike CFO, Matthew Friend, confidently stated, “Marketplace demand continues to significantly exceed available inventory supply, with a healthy pull market across our geographies.”

Taking a look at what’s in store in the next few months, JPMorgan analyst Matthew Boss highlighted consumers could be awaiting the FlyEase platform and other new launches across the running category.

These include Infinity, Invincible, and Pegasus, as well as Women’s Dri-Fit Alpha Bra and next-generation leggings, along with the global football-specific launches.

However, increased supply chain and transportation constraints and ongoing geopolitical uncertainty could pose a risk to the potential upside.

Margin Expansion

Impressively, in Q3, NIKE’s gross margin improved by 100 basis points from the prior year to 46.6% despite supply chain headwinds.

The upside was driven by margin expansion in NIKE’s Direct business aided by lower markdowns, favorable foreign currency rates, and a higher mix of full-price sales partially offset by lower full-price product margins pulled down by increased freight and logistics costs.

More optimistically, based on expectations of continued full-price realization and lower channel markdowns, and continuing favorable foreign currency offsetting higher input costs, among other constraints, management raised its FY2022 gross margin outlook to at least 150bps .

JPMorgan Remain Buyers of Nike

Impressed by the upbeat Q3 results, JPMorgan analyst Matthew Boss increased the price target on Nike to $164 (23.2% upside potential) from $162 while sticking to his Buy rating.

Boss arrived at his new price target based on a 33x CY23 earnings per share (EPS), which is equivalent to Nike’s five-year historical average, or a 2x price/earnings to growth (PEG) to the mid-point of the company’s mid/high teens EPS growth expectations.

Boss remains a buyer of the stock based on his thesis that Nike is set for sustainable multi-year high single-digit to low double-digit revenues growth.

Furthermore, persistent gross margin expansion coupled with unabated brand momentum across geographies will offset macro volatility ensuring lasting EPS growth in the mid-to-high teens for the coming years.  

Wall Street’s Take

Meanwhile, Morgan Stanley analyst Kimberly Greenberger has a more cautious stance on Nike.

While reiterating a Buy rating with the price target of $192 (44.26% upside potential), Greenberger will wait to make upward revisions as he believes the demand trends still remain blurry until the summer months.

He thinks that signs of a better demand trend in Greater China are key to overall growth acceleration. Further, rising oil prices could impact results alongside the impact of the ongoing Russia Ukraine conflicts.

On TipRanks, however, Nike stock commands a Strong Buy consensus rating based on 20 Buys and six Holds. As for price targets, the average Nike stock price prediction of $167.17 implies 23.69% upside potential from current levels.

Conclusion

Nike’s upcoming product launches and impending gross margin expansion give a promising outlook. Likewise, a rebound in revenues in tandem with robust underlying demand, especially in China, could serve as a catalyst for Nike shares.

However, investors should keep a close watch on the impact of the current geopolitical events on stock price performance in the coming months.

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