Over the last six months, Nike’s shares have sunk to $62.18, producing a disappointing 15.2% loss while the S&P 500 was flat. This may have investors wondering how to approach the situation.
Is now the time to buy Nike, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Nike Will Underperform?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why there are better opportunities than NKE and a stock we'd rather own.
1. Declining Constant Currency Revenue, Demand Takes a Hit
In addition to reported revenue, constant currency revenue is a useful data point for analyzing Footwear companies. This metric excludes currency movements, which are outside of Nike’s control and are not indicative of underlying demand.
Over the last two years, Nike’s constant currency revenue averaged 2% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Nike might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Nike’s revenue to drop by 6.4%, a decrease from its 2.8% annualized declines for the past two years. This projection doesn't excite us and indicates its products and services will face some demand challenges.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Nike’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Nike doesn’t pass our quality test. Following the recent decline, the stock trades at 30.7× forward P/E (or $62.18 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of Nike
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