Global athletic apparel giant Nike (NYSE:NKE) has been on fire for the past several quarters, and even though it has exhibited some near-term weakness, Nike stock is still a good buy.
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The company has successfully leveraged sport and active lifestyle adoption tailwinds across the globe, as well as unparalleled innovation in the athletic apparel category, to drive sustained robust revenue growth, healthy operating margin expansion, and even bigger profit growth. In response, NKE stock has surged to all-time highs.
All of this continued in December. Nike reported blowout second-quarter numbers which breezed past expectations. Revenues rose by more than 10% in constant currency. Again. Gross margins expanded. Again. Positive operating leverage drove expense rate compression. Again. Profits rose by more than 20%. Again.
That is, all of this continued in December except for one thing. NKE stock didn’t rally after the strong second-quarter print. Instead, the stock dropped.
Normally, when a stock fails to rally on good news, that is a sign of rally exhaustion and valuation friction. You are getting a bit of both of those things here. Nike stock has come very far, very fast, and the valuation does appear extended.
But, Nike is also firing on all cylinders, and will continue to fire on all cylinders for the foreseeable future. So long as that remains true, any and all weakness in NKE stock is temporary, and nothing more than a buying opportunity.
Nike Is on Fire
Nike is absolutely on fire right now, and there are no signs that this company will lose any momentum in 2020. If anything, the company may actually gain momentum.
Nike has now rattled off five straight quarters of double-digit constant currency revenue growth. That is very impressive for a retail apparel company that already counts itself as one of the largest brands in the world with a $40 billion-plus sales base. This sustained robust revenue growth at scale speaks to two things.
First, sport and active lifestyle tailwinds remain robust. That is, everyone is buying athletic apparel these days. This trend has been alive and well for several years. There are no signs that it will slow anytime soon.
Instead, it appears consumers are increasingly concerned about their well-being, healthiness, and personal activity. The more they are concerned about those things, the more they will be active, and the more they will wear active clothes, like Nike clothes.
Second, Nike has further distinguished itself as the leader in the athletic apparel pack. The company has successfully merged athletic performance with lifestyle culture, and in so doing, they’ve created a brand that resonates with professional athletes and casual fans alike.
They’ve also doubled down on their innovation pipeline to continuously pump out new, fresh, and exciting styles at a rapid rate. Their distribution has benefited from innovation, too, as Nike’s big direct sales push is attracting more and more consumers.
Big picture? Nike is the leader in a secular growth category that isn’t slowing, and as such, Nike’s current hot streak will live on for a lot longer.
Nike Stock Is Going Higher
Yes, Nike is richly valued today. Yes, the stock has come very far, very fast. But, while both of these truths will cause turbulence in the stock, they won’t derail NKE stock’s upward trajectory.
Instead, the fundamentals actually point to NKE stock going higher in 2020.
The numbers are simple. The global apparel market projects to grow at a 5%-plus rate over the next several years. Athletic apparel, which is the hottest vertical in the apparel category, should grow faster than that — maybe in the 6-7% range. Nike, which is the best-in-class company in the athletic apparel vertical, should grow revenues faster than the athletic apparel market — probably somewhere in the 7-10% range.
At the same time, gross margins should trend higher thanks to solid demand drivers and the company’s favorable pricing power. Sales, general, and administrative expenses should continue to rise at a historically normal mid single digit rate, allowing room for sizable opex leverage. The company is also repurchasing shares.
Putting all that together, Nike projects as a 7-10% revenue grower over the next few years, with upside margin and buyback drivers that should spark 15%-plus profit growth. Assuming so, my modeling pegs Nike’s 2026 earnings per share target at $7.50.
Based on an exit multiple of 22-times forward earnings (about average for consumer discretionary stocks) and a 9% annual discount rate (to account for the 1% yield), that equates to a 2020 price target for NKE stock of nearly $110.
Bottom Line on NKE Stock
Nike is the leader in a secular growth category, and the company is consequently firing on all cylinders. So long as that remains true, NKE stock will remain a high quality “buy the dip” stock. That is, whenever NKE stock has a sizable pullback of 5% or more, that weakness offers a great buying opportunity.
As of this writing, Luke Lango was long NKE.
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