The broader market sell-off has taken a toll on Nike (NKE) stock also. It is down 30% for the year and hit its 52-week low recently. The stock is underperforming the markets by a wide margin. What’s the forecast for NKE stock and should you buy it now after the crash?
Nike is expected to release its fiscal third-quarter 2022 earnings later this month. Analysts expect the company to post revenues of $10.6 billion in the quarter, a YoY rise of 2.8%. The company’s adjusted EPS is expected to fall 20% YoY to $0.72 in the quarter.
Why has Nike stock been underperforming?
Being a global enterprise, Nike is quite exposed to the Russia-Ukraine war. Also, it has a high exposure to China, whose economy has been slowing down. The country is battling the highest number of daily coronavirus cases since the pandemic began. Apple and Nike are the two companies that have a high dependence on China. Not only is China a major market for these companies, but also a major sourcing destination.
Another notable aspect is that the soaring US-China relations are not good news for companies like NKE. In the past also, it has faced boycott calls in China over its comments on Xinjiang.
How do analysts perceive the fall in Nike stock?
Bernstein believes that Nike along with Peloton is “absurdly attractive” at these price levels. Bernstein analyst Aneesha Sherman initiated coverage of Nike with an overweight rating and a $160 target price. “We believe the sector’s disruptions give investors the opportunity to find unusually attractive (in some cases, absurdly attractive) entry points into high-return investments,” she said in her note.
Sherman believes that Nike looks “better than ever” now. She added, “Nike remains the long-term quality play, and today its market position is better than ever, with higher share, more direct sales, more capital light e-commerce sales, better customer feedback and an acceleration in customer growth.”
UBS has mixed feelings
While UBS reiterated its buy rating on the stock, it is apprehensive about negative catalysts in the company’s upcoming earnings. “We think Nike’s 4Q22 guidance and its initial FY23 outlook, if it offers one, will disappoint the market. Our checks suggest Nike’s China business is not recovering as fast as we, or the market, expected,” it said in its note.
Nike stock forecast
Looking at the consolidated ratings, Wall Street analysts have a bullish forecast and a consensus buy rating on the stock. Of the 32 analysts covering NKE, 24 rate it as a buy or equivalent while seven rate it as a hold. One analyst has a sell rating on the stock. NKE stock has a median target price of $176 which is a 48.8% upside over current prices. Its street high target price is $202 which is a premium of 70.8% over current prices. The stock even trades 5% below the street low target price of $125.
Key drivers for Nike stock
There are several growth drivers for Nike stock that would help it increase both the topline as well as the bottomline. The company is focusing on direct sales while cutting down on wholesale sales. This is helping it improve its profit margins. Also, the percentage of online sales in its sales mix has been rising gradually which would help in margin expansion and better reach.
In the medium to long term, metaverse would be a key growth driver for Nike. The company has launched the 3D immersive world of NIKELAND on online gaming platform Roblox. NKE also acquired virtual sneaker company RTFKT to boost its metaverse offerings.
Commenting on the RTFKT acquisition, Nike had said, “This acquisition is another step that accelerates Nike’s digital transformation and allows us to serve athletes and creators at the intersection of sport, creativity, gaming and culture.” It added, “We’re acquiring a very talented team of creators with an authentic and connected brand. Our plan is to invest in the RTFKT brand, serve and grow their innovative and creative community and extend Nike’s digital footprint and capabilities.”
Short term headwinds
Nike is facing issues in the short term amid the global supply chain issues. Also, rising inflation is not helping matters as companies are witnessing input cost inflation. The slowdown in China is another major challenge for Nike. Notably, in the previous earnings call, the company had expressed optimism over a continued recovery in the Greater China region.
During the company’s upcoming earnings release, markets would watch for the commentary on the full-year guidance. The management’s commentary on the demand environment in China would also be crucial to watch.
Should you buy Nike stock?
Looking at the valuations, Nike stock trades at an NTM (next-12 months) PE of 28.6x. The multiples have corrected sharply from their peaks last year when the valuations had started to appear stretched. At these multiples, Nike stock looks quite attractive especially if you are a long-term investor.
How to invest in Nike stock?
An alternative approach to investing in the consumer discretionary ecosystem could be to invest in ETFs that invest in consumer discretionary companies like NKE.
Through a consumer discretionary ETF, you can diversify your risks across many companies instead of just investing in a few companies. While this may mean that you might miss out on “home runs” you would also not end up owning the worst-performing stocks in your portfolio.
By investing in an ETF, one gets returns that are linked to the underlying index after accounting for the fees and other transaction costs. There is also a guide on how to trade in ETFs.