With all the negative trends surrounding Nike, where is the bottom, and at what price, if any, does the stock become attractive?

Question

- Nike is trading at a 52-week low and is actually lower than it was 10 years ago.
- Sales have been declining quarter over quarter.
- The company is set to be removed from the S&P 500 Index after its market value dropped sharply over the past year.
- Negative publicity surrounding its advertising campaigns and turnaround efforts.

I.e it all seems like a nightmare for Nike, with the stock price suggesting that the company has completely lost its way.

LTV · Accepted Answer

I am researching it now as well. Basically, Nike is trading at around 1x annual revenue and 18x its compressed earnings, which I believe is cheap given the strength of its (still) huge brand. However, there are indeed a lot of negative factors.

The key question, in my opinion, and the one that will be decisive in its turnaround, is whether Nike can reconnect with the tastes of new consumers. As an example, I am a runner myself and remember when Nike was at the top of the game. At the moment, it simply does not feel that way. If you go to a marathon or even an occasional run, you see far more people wearing Hoka, On, Adidas, etc. It is as if Nike has lost its vibe with the crowd.

Part of the reason, in my opinion, was its decision to move away from sports-centered marketing, where each sport had its own key marketing messages and communication, toward a more general approach focused on broader brand messaging. Over time, I believe this caused Nike to lose some of its edge in individual sports.

Coupled with the decision to focus more heavily on online sales and move away from some traditional retailers after the pandemic, this created a perception that Nike was no longer creating something new or pushing the boundaries in each particular sport, but rather constantly selling and promoting its legacy products. As a result, Nike is now in a difficult position and needs a serious turnaround before things get better.

The good news, in my opinion, is that the company has the resources to do it. It is still one of the largest brands in the world, its balance sheet is strong, and given how far its market cap has fallen from its previous levels, the irony is that not many investors now expect Nike to deliver strong results quarter after quarter. This actually gives the company some time to focus on executing its turnaround. The question is whether it will take the right steps.

As for the stock, I am researching it further now. However, purely based on the financials, and assuming a negative case with no revenue growth for five years and relatively aggressive cost-of-capital assumptions, I estimate that annual free cash flow could be around $3–4 billion. At a 10% cost of capital and 3% terminal growth, my model produces a stock price range of approximately $30–35 per share.

As a result, at the current price of around $38 (at the time of writing), I would need at least some confidence in Nike’s turnaround plan and marketing strategy before buying. This is what I am looking into now.

Q&A

With all the negative trends surrounding Nike, where is the bottom, and at what price, if any, does the stock become attractive?

QUESTION LOG