Shares of Nike (NYSE:NKE) have fallen off their all time highs recently as the athletic apparel giant has found itself in the cross-hairs of escalating trade tensions between the U.S. and China. In response, Nike stock has dropped nearly 10% over the past few weeks amid escalating U.S.-China trade tensions.
Source: Kristian Olsen Via Unsplash
In short, Nike outsources a bunch of its footwear production, so higher tariffs mean higher input prices for Nike, which either means lower margins or higher prices for consumers, neither of which is favorable for profit growth. But this near term weakness in Nike stock is nothing to worry about.
In the big picture, Nike will be able to weather this trade war storm for the foreseeable future, and NKE should ultimately be an out-performer over the next few quarters.
Why? Four big reasons. Those reasons are as follows.
1. Nike Can Absorb Price Increases
Tariffs are a potentially huge risk for athletic apparel companies that can’t hike prices without major customer churn. Nike is not one of those companies.
Nike’s customer isn’t price sensitive. You don’t buy Nike shoes or Nike gear because it’s cheap. You buy it because it’s the best of the best in the athletic apparel market, or because it’s the coolest thing to buy, or because your favorite athlete wears Nike. Price is a secondary component here. Thus, if Nike is forced to raise prices because of higher tariffs, the impact to sales won’t be meaningful. There may be some churn. But not much.
All in all, then, Nike has the premium brand equity to absorb tariff-inspired price hikes.
2. The Fortnite Deal
One way to offset trade-related weakness is to produce your own business-specific tailwinds. That’s exactly what Nike is doing.
Specifically, Nike just signed a big deal with Epic Games wherein Jordan brand avatars will be featured in the hugely popular Fortnite game. That’s a big deal. Fortnite has around 250 million active players, most of whom skew young.
Thus, Nike’s Jordan brand logo will consistently appear in front 250 million young eyeballs across the world. That is golden advertising, and it will almost certainly provide a nice growth tailwind for the Jordan brand.
As such, while trade-related weakness may ding margins and sales some over the next few quarters, some of that weakness will be offset by Fortnite-inspired Jordan brand strength.
3. Upcoming Signature Shoe Launch
The Fortnite catalyst is big, but it pales in comparison to what will likely be a colossal tailwind coming soon in the basketball market.
Nike is set to launch a new signature basketball shoe from rising NBA superstar and MVP candidate Giannis Antetokounmpo soon. Nike doesn’t launch new signature basketball shoes all that often, but when they do, they tend to have a very big impact. This one should be no different.
Indeed, the tailwinds may actually be bigger than ever. Giannis is on the verge of earning his first MVP trophy, may go to the NBA Finals, and is an exceptionally likable athlete with a big fan base.
Broadly, then, Nike is on the verge of arguably its biggest catalyst in recent memory, and this catalyst should more than offset any and all trade related noise.
4. Nike Hasn’t Had Any Problems in China
Importantly, while many other U.S. companies have struggled in China over the past several months, Nike has not.
Over the past few quarters and months, big U.S. companies with sizable China presences like Starbucks (NASDAQ:SBUX) and Apple (NASDAQ:AAPL) have reported slowing China growth. Not Nike. Instead, when Apple was reporting a massive slowdown in its China business in late 2018, Nike said that its China business actually improved and was firing on all cylinders. It continues to fire on all cylinders today.
In other words, one of the biggest risks to the current trade war is a slowdown in the China economy, but Nike’s secular growth tailwinds have made it thus far immune to any and all China slowdowns.
Bottom Line on Nike Stock
Nike stock is selling off on trade-related concerns. Some of this selloff makes sense. Nike stock is not immune to the trade war, and indeed bears broad exposure to tariffs. But, the company has proven itself largely resilient to trade war noise, and has enough growth catalysts in the pipeline to offset trade-related weakness.
As such, NKE stock looks like a good buy here on trade-related weakness. Such weakness won’t last long.
As of this writing, Luke Lango was long NKE and AAPL.
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