To The Moon

$Nike(NKE)$

Today is my update on Nike stock, so let’s dive into it. The stock has been a significant disappointment, experiencing a consistent downtrend since its peak around $170–$175 per share in 2021. As shown in the chart, this decline has been relentless.

I’ve discussed Nike stock extensively in my previous article since 2022, when it was trading between $120–$130 per share. My fair price has consistently around $65 per share, and now the stock is edging closer, currently trading at $76.

However, I’ve noticed some recent developments that make me cautiously optimistic. I’ll break down Nike’s latest earnings report, provide a simple valuation model, and share my updated opinion on whether Nike presents a generational buying opportunity or remains an overvalued stock to avoid.

Recent Developments:

Prominent Investors Buying In: A key point of interest is that several well-known investors have recently added to their Nike positions. Notably, Bill Ackman increased his Nike stake by 435%, making the stock over 11% of his portfolio. Ackman is a highly regarded investor managing $13 billion in assets. While he has made mistakes, his confidence in Nike at current levels suggests optimism about the company’s future.

Leadership Changes: Another factor is the return of Nike’s former CEO. He seems focused on returning to basics, steering the company away from the missteps of the previous leadership. Leadership changes often lead to shifts in sentiment, and if the new CEO can prove his strategy effective over the next few earnings calls, it could change how investors view the company.

Earnings Report and Challenges:

The latest earnings report was mixed. Nike reported $0.78 EPS versus the expected $0.63 and met revenue estimates. However, the company revised its guidance lower, citing prolonged turnaround efforts. Despite heavy discounting, In its latest earnings report, Nike reported a 13% decline in retail and online sales and a 3% drop in wholesale revenues, despite efforts to boost sales through aggressive discounting. The decline in sales occurred even as the company relied heavily on promotions, raising concerns about the effectiveness of its pricing and marketing strategies.

Discounting typically boosts sales, so declining sales even with price cuts point to deeper issues, potentially with the brand’s appeal. Customers may be gravitating toward competitors offering better value or more appealing options, signaling a potential erosion of Nike’s brand strength.

Competitive Pressures

Rise of Competitors: Brands like Adidas (with its Yeezy collaborations before termination), Lululemon (in athleisure), and New Balance (popular among Gen Z) have gained market share. Emerging Players: Smaller, lifestyle-oriented brands with niche appeal and strong digital strategies are capturing younger, trend-conscious consumers.

Inventory Issue

Nike's inventory issues have been a critical concern over the past couple of years, impacting its profitability and overall market performance.

Inventory Build-Up

2021 Misstep: During the COVID-19 pandemic, Nike ramped up inventory, anticipating sustained high demand. However, this surge was largely fueled by temporary factors like stimulus checks and changes in consumer behavior, which didn't persist as the pandemic waned.

Overstocking Consequences: As demand normalized, Nike found itself with excess inventory, forcing the company to engage in aggressive discounting to clear stock.

Repeated Inventory Surges Even after addressing the initial surplus, Nike's inventory levels climbed again in subsequent quarters, signaling ongoing supply chain mismatches or misaligned demand forecasting.

Nike's inventory issues underscore the need for a balanced approach to demand forecasting, supply chain management, and brand strategy. While the company is actively addressing the problem, the prolonged timeline for resolution has raised questions about its execution and leadership. To regain investor confidence, Nike must demonstrate tangible progress in managing inventory and improving operational efficiency.

Market Sentiment

Economic Pressures: Rising inflation and economic uncertainty have tightened consumer spending on non-essential goods, including premium footwear and apparel.

Shift in Consumer Preferences: The pandemic accelerated a pivot to athleisure, but the category has since matured. Consumers may now be exploring other fashion and footwear trends, leading to reduced demand for Nike’s core offerings.

Valuation and Outlook:

Nike is currently trading at a forward P/E ratio of 27, compared to its 10-year average of 29–30. Analysts project an optimistic recovery, with EPS growth averaging 18–20% annually through 2029. If these projections hold, and Nike trades at 30x earnings by 2029, the stock could reach $130 per share—about a 71% upside from current levels.

However, such a scenario assumes significant improvement despite the company’s ongoing struggles. For me, the numbers don’t justify buying at these levels, especially with better opportunities in the market.

Let me break this down in simple terms. Analysts are predicting a strong recovery for Nike over the next four years. They're forecasting a shift from a 44% decline in EPS to a 20% increase in fiscal 2026, followed by growth rates of 20% in 2027 and 2028, and 11% in 2029. This averages out to about 18-20% annually, which I believe is overly optimistic given the prolonged turnaround efforts.

Still, for argument's sake, let’s assume this growth materializes. By 2029, EPS could reach $4.34 per share. Using a forward price-to-earnings (P/E) ratio of 30—optimistic but reasonable for a quality company like Nike—the stock price would be approximately $130 per share. With the stock currently trading at around $76, this represents about a 71% upside over the next four to five years.

However, even with these best-case assumptions, a 71% gain over such a long period doesn’t excite me. Especially considering Nike’s failure to execute a successful turnaround in the past two years, I can’t justify paying 30 times earnings for this stock.

Conclusion

While some investors may see potential in Nike, I’m sticking with my $65 fair value half of the optimistic $130 target. While the stock may never reach that level (it hasn’t since March 2020), I still see better opportunities in the market. For instance, companies like Google were recently trading at 19-20 times earnings, offering much more compelling value. For those comfortable with a 71% upside over four to five years, Nike might be worth considering. Personally, I see better opportunities elsewhere. Let me know your thoughts in the comments.

To sum up, Nike at its current valuation doesn’t make sense to me. If you’re comfortable with the projected 70% upside over the next few years, you might consider it. But personally, I’m staying away, as there are better options elsewhere.

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