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3 Reasons to Buy Nike Stock Right Now

consumer discretionary Mar 30, 2023

Price Target: Unlock 🔐 

Target Date: Unlock 🔐 

Stock: Nike ($NKE)


With the market appearing to stabilize a little after this month's wild bank ride, it's time to revisit some of our fundamental strategies and see if they are still sound and making progress toward their main goals. 

For us, the consumer economy is one of the more fundamental bellwethers for the recovery our market is trying to make.

And no brand is better for checking the pulse of the whole market than Nike.

Nike has shown some "solid recovery" after getting pretty much cut in half across a brutal 2022.

But now, Nike's revenues are back on track, and it really appears that we are on the other side of peak inventory for the brand. 

Frankly, given that Nike reported earnings during a bit of market fear is the only thing keeping their stock undervalued.

But looking at their growth and revenue progress, their guidance for the year honestly reads a little conservative. We like seeing more conservative projections from cautious brands, but we feel like this is a good moment to up our price target before Nike beats those guidance expectations. 

So let's take a quick look at the ongoing recovery over at Nike. The rest of the market is pulling away from the stock on potential Chinese headwinds, but are those fears being overblown?

There's a lot more to cover on why this stock can deliver strong returns, so let's get into it 👇

Inventory Keeps Improving:

If you remember our last report, you'll know that one of the biggest factors weighing down Nike's stock in the last year has been its glut of inventory. 

And this quarter, Nike is sitting on a painfully massive 8.9 billion dollar pile of total inventory -- which is up 16% from last year. However, last quarter that inventory pile had increased 43% and was over 9 billion dollars. 

But now this quarter, while the current inventory glut at Nike is still expensive and barely tenable, the market is almost completely ignoring the fact that inventory is now down quarter-over-quarter, and has only pulled a very small YoY increase -- aka the inventory is starting to clear up.

While other brands' free cash flow is stymied by inventory surpluses in the high double-digits, Nike is rapidly pulling off a strong liquidation of all this excess inventory without eating too much into their margins. 

You can easily imagine the potential death spiral for a LOT of consumer brands here: too many brands need to liquidate too much inventory at a time when prices are too high and FX issues are already taking a huge bite out of worldwide revenue.

But the fact that Nike is pushing their inventory down while only losing 3% of their gross margin is awesome. This speaks more to Nike's brand power than anything else. In order to liquidate excess inventory, a brand like Nike does not have to discount too steeply. 

Furthermore, FX costs are covering up the major story at Nike, wherein their DTC efforts keep improving. Nike's DTC efforts managed to increase by 23%.

This is huge as Nike slowly adopts a more hybrid model that helps them increase margins and boost the value of each individual customer.

And as inflation gets more and more under control, these margins will keep expanding as NKE continues to own more and more of the customer relationship. 

However, the market is still bailing a little on the stock in the wake of last week's earnings call, so what gives? 

 

Nike's Big Concerns:

Frankly, Nike's biggest issue is China. Revenue across the Pacific is still growing, but only by 1%. Once again, e-commerce is lifting those numbers a bit as Nike Direct is up 3% in China. 

But such a small increase in one of the world's most valuable markets is very concerning, particularly because the Chinese market was such a big focus for the Nike team. 

But, once again, just taking a quick look at the numbers behind that growth helps paint a more hopeful picture. 

Most importantly, that slow growth came after a huge decline in Marketing spend. With Nike staying lean to preserve margins, they didn't spend nearly enough to drive meaningful growth in China. Since most folks reading this are in more western-facing markets, it can be hard to keep in mind that Nike's brand isn't ubiquitous. It has to be built through complex and massive brand campaigns.

Therefore if that spend goes down, brand share declines. And Nike still has a LOT of work left to do in order for them to successfully penetrate the Chinese market. 

However, Nike's leadership is confident about their ability to get back to a level of brand building that is appropriate as we move through the rest of this year. 

 

Nike Outlook:

Frankly, our price target reflects that this is a moment of relative weakness at Nike. 

The yearly guidance Nike presented to shareholders last week represents a much more conservative growth trajectory compared to other times in Nike's brand history.

Nike is clearly trying to protect their stock from any potential continuations of this downturn.

So while we're confident Nike will hit our price target if they simply keep to expectations, our analyst team genuinely wouldn't be surprised if we overshot here as Nike smashes through the guidance numbers they've set out here. 

All the signs point to the positive. but we've got a long way to go here. We're really excited to see what they can keep pulling off. 


Rating: Overweight

Market Cap: $184B

P/E Ratio: 32x

Dividend Yield: 1.17%

Risk/Reward: Medium/Medium