Here are some reasons why the recent selling of Nike stock in the company that manufactures shoes and sporting clothing is a mistake.

It’s not hard to see why the share price of Nike Inc (NYSE:NKE) dropped when the company reported profits for the first quarter of its fiscal 2023 year last week.

The revenue for the quarter that ended on August 31 was $12.7 billion, representing a year-over-year increase of just 4%, while profits per share decreased by 20% to $0.93. Both statistics were better than expected, but inventory levels are up 44% from last year, pushing Nike Inc to aggressively reduce some of its items to clear them out of the warehouse. Along with other retailers, it increased its inventory levels to overcome bottlenecks in the supply chain; however, those delays have, for the most part, been resolved.

This was reflected in Nike’s guidance, as the company’s management projected a decrease in gross margin of between 350 and 400 basis points and stated on the results call that supply chain costs, as well as freight and transportation costs, would be increased. This advice suggested that there would be another significant decline in earnings during the current quarter, which appeared to be the key factor for the 13% loss in stock price that occurred on September 30.

Even if Nike stock has made up for some of those previous losses, the sell-off appears to have been caused by an incorrect perception of the fundamental performance of the firm.

The rate of sales growth at Nike Inc is still quite good.

The company’s currency-neutral revenue climbed by 10% yearly, even though reported sales increased by just 4% in the first quarter. Nike Inc, like many other worldwide corporations, is experiencing difficulties due to a higher dollar; nevertheless, this should not deter investors from focusing on the strength of the core businesses.

In a similar vein, if you exclude China from the equation, where COVID-19-related lockdowns have caused a steep drop in retail sales, revenue growth appears to be considerably more robust. Revenue increased by at least 13% year over year in each of Nike’s three regions outside of China, with 13% growth in North America, 16% growth in Asia-Pacific and Latin America, and 17% growth in Europe, the Middle East, and Africa. These percentage increases were calculated without taking into account the effects of currency fluctuations. This is a tremendous growth rate, especially for a consumer firm that is the market leader in its category and is bringing in almost $50 billion in revenue this year. The headline number was negatively impacted due to China’s 13% decline in currency-neutral revenue.

Despite the challenges faced by the company, the demand continues to be high. During the call, the Chief Financial Officer (CFO) Matt Friend stated, “Demand for Nike, Jordan, and Converse continues to be uniquely strong, with favorable consumer response and high full-price realization on fresh seasonal assortments and key product franchises.” 

In addition to this, he mentioned that sales for the month of September as a whole are up by double digits, and the business has projected that revenue growth for the current quarter will be in the low double digits. This is even though foreign exchange headwinds are 900 basis points. To put it another way, assuming that there is no impact from currency fluctuations, revenue should increase by at least 20% during this quarter. That the brand would continue on its current trajectory should comfort investors.

The price of Nike stock is low

Nike stock, along with most of the market’s other major players, has experienced a precipitous decline over the last year, and the company’s current share price is around fifty percent lower than its all-time high. The stock price hasn’t been this low since the beginning of the epidemic, and its price-to-earnings ratio of 26 is the lowest it’s been since 2017. Additionally, the price-to-earnings ratio is the lowest it’s been since 2017.

The management team at Nike anticipates a decrease in earnings for the current fiscal year. Still, they anticipate a rebound in earnings for the fiscal year 2024 when the macroeconomic climate is expected to normalize, inventory levels are expected to normalize, and China’s periodic COVID-19 lockdowns are expected to end.

All of the issues that Nike Inc is currently facing are just transitory, including those that were the direct reason for the stock dropping last Friday. The management anticipates that inventory levels will decrease, stating that they reached their highest point during the first quarter and that currency headwinds will soon become less of an issue. The sportswear giant Nike is now more than 50 years old, and the strength of its brand, which will drive the company’s long-term growth, is evident from strong customer demand and currency-neutral revenue growth outside of China. 

Nike has demonstrated in the past that it can survive and thrive through down economies. Nike is also outpacing its closest competitors: Adidas recorded 4% currency-neutral sales growth in its most recent quarter, while Under Armour scored a 2% constant-dollar increase in its most recent report. This demonstrates that it is increasing its market share despite the challenging climate.

Wall Street looks to be making a typical error with the current sell-off by selling the company due to short-term obstacles while disregarding the long-term potential in front of Nike. Individual investors have the opportunity to profit from that mistake.

Should you put $1,000 into a NIKE Inc. investment right now?

You’ll want to pay attention to this information before considering NIKE, Inc.

NIKE Inc. was not included on the list of the ten best stocks for investors to purchase right now that was just released by our prestigious research team, which has won several awards for its work.

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