Is Nike Really Overvalued?

With no doubt, 2015 proved to be a fruitful year for Nike as the company was one of the best performing stocks of the Dow Jones. Athletic apparel market has been growing consistently for several years and Nike’s gradual gross margin expansion made the stock a winner. The stock, however, is down considerably over 10% from its all time-highs.

Despite the dip, Nike is trading at over 25x trailing earnings. While many investors tend to stay away from Nike due to its rich valuation, I strongly believe in Nike’s strategy. Hence, I expect the stock to continue moving higher despite the ongoing correction in the stock market.

Nike has steadily delivered solid results quarter after quarter due to growing margins and fostering innovation in products.
In Q2FY16, the company shared earnings per share of $0.90, $0.04 more than the analyst estimate of $0.86, whereas, revenue for the quarter came in at $7.7 billion compared to consensus estimate of $7.81 billion.

At the end of quarter, the company reported that worldwide future orders for athletic footwear and apparel were up 15 percent as compared to the corresponding quarter of the previous year. Despite the foreign currency exchange headwinds, the company managed to sustain its revenue growth nicely.

Integrating the latest skills and testing with advanced ideas has been Nike’s speciality and its partnering with Flex in manufacturing is one such example. Flex allows Nike to speed up in the direction of manufacturing revolution they desire to accomplish. It is just a start for now, but the company, as well as the analysts, believe that incorporating Flex manufacturing will endure profitable results for Nike in the long run. It will help also the company to reduce production wastage and lead to cost and resource optimization.

For instance, the combination of automated material management with automated laser cutting can decrease waste up to 50 percent. Nike’s partnership with Flex in the long term can renovate the overall supply chain where time of delivery will shrink from weeks to days as well as digitalization of retail avenues can redefine the purchasing experience for customers.

No one can exactly predict about the Nike’s near term, but if the company endures to achieve long-term goals, then it looks almost definite that this year will prove to be the best year ever for Nike from a business point of view. However, Nike’s gross margin is likely to drop around 50 basis points in the existing quarter mainly due to its struggles to clear year-end inventory and proficiently introduce latest products to market. That being said, the stock still looks like a long-term winner.


Innovation has always been Nike’s core strength and although its gross margin is expected to decline in the short-term, the stock, despite its rich valuation, looks good for the long-run.
Published on Jan 21, 2016
By Akshansh Gandhi

Copyrighted 2020. Content published with author's permission.

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