Under Armour Vs Nike Stock: Which Is Best?

Nike (NYSE:NKE) and Under Armour (NYSE:UA) may both be familiar names to sports enthusiasts but comparing them is more akin to a David and Goliath contrast than an apples to apples one. That’s because Nike is about 45 times larger than Under Armour. 

But that’s not the only difference between these two sports apparel companies. As you’ll discover, one has a sustainable moat, and the other is more of a commodity retailer. In the battle between Under Armour vs Nike, which is best? You’re about to find out.

Is Nike a Good Stock to Buy?

When you zoom out, you’ll find Nike is the Goliath in this battle with a $148.1 billion market capitalization thanks to its global footprint and massive sales, which were last quarter clocked at $12.8 billion.

Indeed on an annual basis, sales have been impressive too. For the fiscal years 2021, 2022, and 2023, Nike reported sales growth of 19.1%, 4.9%, and 9.6%, respectively.

Those numbers aren’t too shabby but they certainly haven’t translated to share price gains – Nike share price is down 18.6% for the year, an astonishing underperformance relative to the S&P 500, which is sitting pretty with a 16.9% gain.

A declining share price isn’t all bad, though. As NKE fell, its dividend yield improved to 1.41%. Income investors have been able to ride a 21 year streak of dividend payments. And it’s likely to continue because Nike’s payout ratio of 39.68%, which signals management is not sacrificing cash flows for growth.

On a valuation basis, the P/E ratio clocks in at a frothy 29.1x, a metric that might raise some eyebrows, though it must be recognized that quality often commands a premium.

When it comes to returns, Nike boasts a return on invested capital (ROIC) of 18.8%, a very impressive number that tells us how well management is doing at converting capital to profits.

More significantly, it reveals Nike has a moat that is wide because few companies can sustain elevated ROICs for long periods unless they have sustainable competitive advantages.

For Nike that moat is its brand advantage, and the Swoosh. Simply put, consumers trust the Nike brand and many become life long customers, increasing the company’s customer lifetime value.

When you put it all together, you end up with a compelling value proposition, and analysts are on board. Out of 33 analysts covering the stock, the average price target is $128.21, offering significant upside from the current share price under $100.

How Does Under Armour Measure Up?

Switching gears to the David in our battle, Under Armour has experienced a more choppy top line.

Sales growth for 2021 was a robust 27.0%, but it tapered off to just 0.8% in fiscal year 2022 and slightly picked up to 3.1% in 2023. Not terrible, but not nearly as consistent as Nike.

The top line may not be as impressive but what about Under Armour’s dividend? Nonexistent, as it turns out. The company pays no dividend, which may be a deal-breaker for some investors who are on the hunt for income while waiting for share price appreciation.

The market capitalization of Under Armour is a more modest $3.04 billion, making it the underdog in this match-up. Nike is literally 45x larger thanks to its global footprint and broader product line offerings.

But Under Armour is attractive on a price-to-earnings ratio basis, featuring a lean 7.9x multiple that suggests the market is not valuing it at the same premium as Nike. 

Where Nike and Under Armour really diverge is on returns on invested capital. Under Armour’s ROIC is a modest 6.4% and signals that the company has failed to build a defensible moat against other sportswear competitors.

Generally, that means management cannot price goods at a premium, but rather is forced into a commodity game that competes in the marketplace on price. That is in stark contrast to Nike which famously can manufacture goods efficiently and inexpensively but charge high amounts.

When it comes to financial standing, Under Armour has $711 million in cash and $1.52 billion in total debt, meaning it simply doesn’t have the capital reserves to take on a titan like Nike anytime soon. By way of contrast, Nike enjoys $7.4 billion in cash, $3.2 billion in short-term investments and has $12.1 billion in total debt.

Still, Under Armour has a shine to it when you look under the hood at cash flows. Our own discounted cash flow forecast reveals Under Armour has a fair value of $11.25 per share, implying a massive 70.1% upside potential. 

Nike vs Under Armour Stock: Which Is Best?

In this David and Goliath battle, both Under Armour and Nike offer different value propositions. Nike is better suited to the long-term investor who wants to own a company with a defensible moat, has deep cash reserves, and pays a modest, yet sustainable, dividend along the way.

Under Armour, on the other hand, is the minnow in the ocean to Nike’s whale. Its small size allows it to be more nimble, however, and potentially offers much greater upside – as high as 70% by our calculations.

Nike’s sheer size and consistent performance make it a more stable choice for conservative investors while those looking for a swing at bat that could lead to a home run could find Under Armour to be the more compelling choice.

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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.