Is Nike Stock Overvalued?

Nike Inc (NYSE:NKE) is the world’s biggest athletic footwear supplier and has its hands in all things sports and street fashion.

This Beaverton, Oregon company was co-founded by Phil Knight (who still serves as Chairman Emeritus) and is used as an example of winning marketing and sales strategies in college business textbooks.

The company is responsible for some of the most iconic products of the past 50 years, including Converse, Air Jordans, Air Force 1, and more.

When the coronavirus pandemic hit the globe, Nike relied on its digital presence to continue generating revenue from its $35 billion brand. This caused the company to emerge on the other side with a historic high market cap over $150 billion, but you don’t grow this big without analysts wondering – is Nike stock overvalued?

Here we explore the company, its products, and its path forward from the coronavirus pandemic to determine its true market value. Let’s start by explaining how it rose in the face of a global pandemic.

Why Nike Stock Went Up

Nike backs some of the most iconic athletes in modern history, from Michael Jordan and Tiger Woods to Cristiano Ronaldo, Neymar, LeBron James, Anderson Silva, and Simone Biles.

The company is so engrained into sports that it actually benefitted when all leagues shut down, as its marketing expenses for live events significantly dropped. This helped the company easily pull its net income up to $1.5 billion for the first quarter of the fiscal year.

The company’s digital presence and strong brand value across the world enabled online sales when the rest of retail retreated. This also helped Nike expand its brand presence in the Europe, Middle East, Africa (EMEA) region and China.

These crucial moves (along with well-timed Netflix documentaries about Jordan and sneakers) propelled interest in the stock from both consumers and investors. Its growth is now approximately 25 percent since the start of the year, and the coronavirus was no match for Nike’s marketing machine.

According to management, it’s focus on the future is in creating and releasing more iconic shoes, appealing to a broader consumer base, and extending its omnichannel strategy, including its successful digital outreach.

Nike Financials Are Surprisingly Good

Nike’s September 2020 earnings report (which covers its first quarter for the 2021 fiscal year) showed revenue of $10.6 billion for the quarter. Of that, $10 billion came from Nike’s brand, while $563 million came from Converse.

Sales were $3.7 billion, and diluted earnings per share were $0.95, far exceeding investor expectations of $0.42.

Gross margins also decreased to 44.8 percent, with sales and administrative expenses decreasing 11 percent to $3.0 billion.

Net income increased 11 percent to $1.5 billion based on the lower marketing costs. The company still holds $9.5 billion in cash, along with $6.7 billion in inventory.

This has investors salivating to see how the holiday 2020 sales go for the company. It has several things going for it, but it’s natural to wonder if this all-time high valuation is too high.

Is Nike Valuation Too High?

Nike’s IPO was held on December 2, 1980. Share prices at the time were $22 per share. With all the splits since then, one share would equate to 128 shares today, with a value over $120 per share.

Investing at $100 in early 2020 was smart, and getting in at its 52-week low of $60 during the coronavirus crash would’ve been a steal. Now that it’s trading over $120, investors wonder if the over-$150 billion market cap is too high.

It may not be – in fact, it may be a value. It’s trading at less than 4x revenue (and about 10x adjusted profits) and paid dividends throughout most of the coronavirus pandemic, equating to $0.98 annual yield in 2020.

The company’s 2019 revenue was $39.1 billion, and the company is still dominating every market it’s in. The return of professional sports brings with it unique marketing opportunities, and the company is sure to find ways to leverage its existing endorsement deals.

At heart, Nike is a marketing company that focuses on brand equity through its iconic swish logo (along with the Converse All Star’s cult following through the generations).

By cutting operating expenses and maintaining sales, Nike has a chance to pivot into whatever it wants. Media outlets are hungry for advertising money, and it can renegotiate discounts while broadening its global appeal. That doesn’t mean the stock can’t drop.

Will Nike Stock Drop?

Although it’s rallying strong, there’s no telling what will happen to the economy in 2021 as government housing and unemployment relief programs end.

With that said, Nike is a component of the S&P 500 and Dow Jones Industrial Average, so its performance has a weight on the entire U.S. economy.

It also has to deal with the same struggles of everyone else in getting its brick-and-mortar retail presence back into profitability.

Nike’s controversial stances (such as backing stigmatizing BLM activist Colin Kaepernick, despite him no longer having an active NFL contract) never seem to hurt it.

While fans may burn the occasional pair of shoes, it only increases their value on the thriving secondary market.

And it has a war chest that can entice any cash-strapped celebrity or business to collaborate. Nike may drop with the rest of the market, but it’s unlikely to be relatively significant.

Is Nike Stock Overvalued? The Bottom Line

Nike is an iconic American brand that’s known worldwide. It has a stable of droolworthy shoes and deep-seeded endorsement deals with celebrated athletes across all professional sports.

When both pro sports and retail were put on hold during coronavirus lockdowns, Nike focused on its digital sales and still churned out a profit through overhead savings.

This dividend-paying stock is riding high during a turbulent economy, and it has an aggressive expansion plan moving into the 2020s. It’s not as cheap as it was when it crashed under $100, but Nike is still a value under $150 for a long-term play over the next 10 years. This is thanks to its deep resources, valuable brand equity, and focused spending on omnichannel marketing.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.