Nike Stock (NYSE:NKE)
Despite the fact that the global economy slowed in the fourth quarter, Nike (NYSE:NKE) performed well. Nike’s dominance in the global sports sector continues to be a primary reason why, despite its small size, it can create revenues at an unprecedented rate.
Nike should have another successful quarter in the following quarter, as China’s liberalization remains an important event. But, sales are unlikely to be as high as in prior quarters since consumers in China and around the world are beginning to spend less. This is because global macroeconomic headwinds remain severe.
Nike Will Receive Orders From Numerous Sources
The openness of China is Nike’s most important concept. Furthermore, as Nike’s most important source of development in recent years, China is the biggest news story. Notwithstanding the fact that the currencies were the same, the company expanded by 30% in North America, EMEA, and APLA. Aside from those markets, Greater China continues to account for the vast majority of Nike’s sales. There could be 500 million to 600 million potential customers in the area, each paying $100 to $200 per year, perhaps adding $1 billion to Nike’s sales in the coming years.
With a combined market worth of $12.5 billion, Asia and Europe, the Middle East, and Africa continue to be key growth drivers. Nike is popular for casual clothing, jogging, and other sports such as basketball. This means that even if the Chinese and North American markets are slowing, other Asian economies, such as India, are expected to grow to $40 billion by 2027, up from $22 billion in 2022.
North American sales were strong during the quarter, with a variety of shoes continuing to hit the market. Nike will continue to focus on North America and China in order to maintain its relatively rapid growth. The Middle East, Latin America, and Europe will see slower growth, but there has recently been a boom in demand for basketball shoes in the Middle East.
Nike’s Goods and Services
Nike’s basketball sector is still profitable, and Jordan Brand and LeBron James sneakers are still in high demand. The new releases from these sub-brands, particularly the LeBron 20s, are projected to make a lot of money because collectors and people who simply want to wear the brand will continue to buy them. Furthermore, Nike, which has usually lagged behind other businesses such as Adidas in football, saw a surge in interest in their Zoom Air Pack, which Mbappe wore during the World Cup.
Nike has made significant expenditures in its internet distribution and online platforms, as well as direct-to-consumer shops. It continues to invest in its online reward and membership programmes, which today have 160 million active users. Nike’s sales may improve marginally compared to a slower cycle due to a combination of online sales and new releases such as Air Jordans, Air Max, and Air Force sneakers, as well as a variety of basketball, football, and other models.
With the exception of football, competition in industries such as running, basketball, and general footwear firms remains relatively low. Nike has recently succeeded in establishing itself as both an athletic and a casual footwear brand, making its footwear more durable.
Nike Will Profit From Better Inventory Management
Nike has also worked hard to reduce inventory, and it plans to continue making its operations more efficient. Total inventory increase fell from 65% to 55% in the most recent quarter, and Nike’s operating margin, which is currently at 13%, might rise to 14.5-15% as a result of improved inventory management.
Despite the latest sales run rate of $49 billion, EBIT declined from $6.6 billion to $6.4 billion, mostly owing to increasing G&A expenses. These costs should be consistent throughout the year, and at the end of the year, things should be back to normal. I expected EBIT to be somewhat higher at the end of the year, albeit by a little margin.
Perspective and valuation
Nike stock has dropped in value during the last year, falling from $133 to $117 and paying a 1.1% dividend. Because interest rates are still rising and Nike’s growth is expected to be about 10% in 2023, the stock is likely to fall even further. Given the direction of interest rates, the current P/E of 33x is a tad excessive. Given the trajectory of global expansion and the size of the market, a much more fair price would be 24 to 25 times earnings.
Nike is also facing a number of issues, the most prominent of which is a decline in consumer spending as the base gain from previous years wears off. Nike will be reliant on China’s weakening economy in 2023. North American consumers are also reducing their expenditures. The combination of these factors could result in a revenue risk where revenue is just 8% greater. This might cause the stock to drop another 10-11%.
Furthermore, Nike now has a beta of about 1.11, which implies that if the market continues to fall and interest rates continue to rise, Nike’s stock may fall somewhat more than the broader market. Despite the elevated beta, the company’s implied volatility has been progressively falling, and its put-call ratio is clearly skewed in favor of calls, indicating that the market remains bullish on the stock.
Nike stock is currently priced at a level where there may not be much room for future growth. Investors are optimistic about Nike’s future performance and growth. Nike is still a solid long-term investment. With a huge market share in the sports footwear category and plenty of room for growth, it’s clear that the premium footwear brand will thrive for a long time. If you buy the stock for the long term, you could earn a 10% return over the next ten years. Taking into account sales in North America, Europe, Greater China, and Asia, as well as market penetration, this would be a good performance, especially given the global economic recession.
Because Nike has a strong brand and is well-known over the world, it is clear that it has a huge competitive advantage that is tough to replicate. Investors may consider purchasing the stock with the intention of holding it for a long period.
Featured Image: Pixabay @ Pexels
