Why I’m Pumped About Nike Stock (and Why You Should Be Too)

The Bigger Picture: Nike’s Historic Drop

Nike hit an all-time high of $179 per share about three years ago. Fast forward to August this year, it hit a low of $70—marking a stunning decline of over 50% in less than three years. But here’s the kicker: despite this dramatic drop, Nike’s fundamentals paint a much brighter picture.

• Last 12 months free cash flow: $7.2 billion
• 5-year average free cash flow: $4.7 billion

This massive increase in free cash flow is a sign of strong financial health. Interestingly, Nike’s free cash flow last year was greater than its net income—an excellent indicator of operational efficiency.

Strong Margins and a Solid Moat

Nike’s gross margins are an impressive 45% and continue to climb as the company shifts its focus to higher-margin products. Their profit margins remain consistent at 10.6%, reinforcing the company’s profitability. At a price-to-free-cash-flow ratio of 16, Nike looks undervalued for a brand with such a strong moat.

Speaking of moats, ask yourself: if you surveyed 100 people about the top sports apparel brand, how many would say Nike? Exactly. It’s a name synonymous with sportswear. But it’s not just about brand recognition; Nike’s return on invested capital (ROIC) tells a compelling story too:

• 5-year ROIC: 19%
• Last year ROIC: 20%

This indicates Nike is efficiently using its investments to generate strong returns—a hallmark of a premium company.

Addressing the Headlines: Why Is Nike Down?

Nike’s 60% drop from its peak isn’t without reason, and there are several factors at play:

1. China’s Economic Slowdown: While China is experiencing a slowdown, it’s still growing—just at a reduced pace.
2. Geopolitical Tensions and Recession Fears: These fears have loomed for a while but haven’t drastically impacted Nike’s long-term potential.
3. Retail Sector Struggles: The retail sector has faced challenges recently, and Nike pulled its full-year guidance—a rare move that spooked investors.

Despite these headwinds, Nike is proactively turning things around. They’re shifting focus from sheer volume to profitability, cutting back inventory on major lines like Air Jordan, Air Force One, and Dunk by 50%. This strategy aims to boost gross margins and, ultimately, the bottom line.

The Global Picture: Nike’s Key Strengths

While some view China as a headache for Nike, it’s worth noting that most of Nike’s production happens in Vietnam and Indonesia, where labor costs are significantly lower than in China. This shift gives Nike a cost advantage.

Moreover, Nike remains the #1 sports brand in China. With China’s massive population of 1.5 billion people and growing interest in sports, Nike is positioned for long-term growth, even as the country’s population growth slows.

What the Analysts Are Saying

Analysts forecast steady growth for Nike’s revenue and profits:

• Revenue: Growing from $52 billion to $67 billion by 2029.
• EPS Growth: $3.77 in 2023 to $6.36 in 2029.

While some volatility is expected, the general trend is upward. If you believe Nike will still be around in 10–20 years (and thriving), the potential for higher profits and revenue is strong.

Using the Stock Analyzer Tool

To determine Nike’s intrinsic value, I used our Stock Analyzer Tool. Here’s how I approached it:

1. Revenue Growth Assumptions:
   
   • Low: 3%
   • Mid: 5%
   • High: 7%
     
2. Profit Margin Assumptions:
   
   • Low: 10%
   • Mid: 11%
   • High: 12%
     
3. PE Ratios:
   
   • Low: 20
   • Mid: 23
   • High: 26
     
4. Desired Return: 9%
   

Based on these inputs, the Stock Analyzer gave the following price targets:

• Low: $60
• Mid: $85
• High: $120
  

At its current price, Nike falls within my buy range, especially with a long-term perspective.

Final Thoughts and an Exclusive Opportunity

Investing is about thinking differently. When negativity surrounds a stock, it’s often the best time to dig deeper. Nike’s fundamentals, global brand power, and strategic shifts make it a compelling buy for me.

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