If anything has become clear over the past two decades, it is that Nike (NYSE:NKE) is a long term winner. While other fashion brands have come and gone with often fickle fashion trends – think Abercrombie & Fitch (NYSE:ANF), Under Armour (NYSE:UAA), Fossil (NASDAQ:FOSL), or L Brands (NYSE:LB) Victoria’s Secret – Nike simply hasn’t. Nike stock has remained almost fad-proof.
For over two decades now, the company has stood firmly atop the secular growth athletic apparel market, and that has powered Nike stock to consistent gains in a long term window.
This will remain true for the foreseeable future for several reasons. Above all else, Nike is innovating way faster than all of its peers, leveraging technology to optimize its product creation strategy, and is bringing new, fresh, and exciting products to market with unprecedented pace.
All of those things boost Nike brand among both professionals and amateurs alike, and maintain Nike as the premiere athletic apparel brand in the world.
Those initiatives will also keep Nike on a winning path for a lot longer.
Every now and then, NKE gets slightly undervalued. See mid-2017. It also gets slightly overvalued from time to time. See mid-2018. Ultimately, those are just opportunities to add and trim. At the end of the day, Nike has risen a whopping 560% over the past ten years. Investors have every reason to believe a similar rally will unfold over the next ten years.
Thus, NKE is a long term buy-and-hold. Trim on big rallies. Add on big dips. But ultimately stick with NKE stock for the long haul.
Nike’s Innovation Is Firing on All Cylinders
If there’s one thing that is most important in the apparel market, it is innovation.
If you innovate better and more quickly than anyone else, then you will consistently bring better and more exciting products to market. Better and more exciting products boost brand awareness and image. Boosted brand awareness and image attracts professionals and amateurs to your brand.
Revenues go up, so you have more money to spend on professional endorsements, which in turn attracts more amateurs, who bring in more money. It’s a positive feedback loop that all starts with innovation.
Over the past two decades, Nike’s innovation in the athletic apparel market has been unprecedented. This arguably remains more true today than it has even been before.
Case 1: Nike Adapt BB. Nike just launched its first ever self-lacing smart basketball shoe. It’s a smart shoe which is controlled by and connected to a smart device, and tightens or loosens based on user preference. Think real world Back to the Future applied to basketball shoes.
Most other athletic apparel companies have yet to launch a self lacing shoe. Nike is applying this technology to performance shoes. Clearly, Nike is way ahead of the curve on self lacing technology. Regardless of if this footwear style becomes the norm or not, Nike’s innovation advantage here illustrates just how forward-thinking this company is.
Case 2: Nike’s Consumer Direct Sciences team. Nike recently expanded its partnership with big data and AI firm Gridsum (NASDAQ:GSUM) to enhance Nike’s data driven marketing and sales approach in China.
This deal simply shows that Nike is much more than an athletic apparel company. They are a technology company that leverages big data analytics to influence and optimize product creation, assortment, and distribution.
Overall, it is clear that Nike is innovating where no one else is the athletic apparel space is innovating. Such innovation has powered huge gains and unprecedented stability in Nike stock over the past twenty years. It will continue to do so over the next twenty years, too.
Nike Stock Will Remain a Winner
Here are the characteristics which have defined NKE over the past five years:
- Mid to high single digit annualized revenue growth.
- Stable operating margins in the low teens range.
- Forward P/E multiple around 25.
Those characteristics have been good enough to lead to Nike stock more than doubling over the past five years. In comparison, here are the characteristics which should define Nike stock over the next five years, given the company’s innovation and leadership position in a secular growth athletic apparel market:
- Mid to high single digit annualized revenue growth.
- Slight operating margin expansion due to more premium product assortments.
- Forward P/E multiple around 30.
Essentially, revenue growth should be the same, and higher earnings growth potential through a more positive outlook on margins is compensated for in a higher forward P/E multiple.
Thus, Nike stock is supported by largely the same characteristics today as it has been over the past five years, a stretch in which Nike stock doubled. In this light, Nike stock looks ready to double again over the next five years.
Bottom Line on NKE Stock
Given the company’s unprecedented innovation, long history of market leadership, and track record of operational excellence, Nike stock is a long term winner.
Dips are merely opportunities to add. Rallies are opportunities to sell. In the long run, this stock will trend significantly higher.
As of this writing, Luke Lango was long NKE, FOSL, and LB.
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