NKE is an attractive buy; the turnaround is progressing and the valuation provides a margin of safety.

If you own Nike stock like I do, or you've been tempted to buy the dip, you need to see this. Nike, one of the most iconic brands on the entire planet, has just crashed to a 12year low.

The stock is down a jaw-dropping 77% from its peak and nearly 40% this year alone.

So, here's the huge question. Is this a rare once in a decade chance to buy a legendary company that's on sale? Or is it a falling knife that could keep on dropping? Let's dig in and stick around because I actually own this one myself and I'm going to share exactly what I'm thinking.

Back in November of 2021, Nike hit an all-time high of about $180 per share.

I took so much criticism for saying it was overvalued and I wasn't even interested in looking at it until it fell under $100. Today, it is now around $38 per share. That is a 77% collapse, the kind of drop that you almost never see from a company this famous and this profitable. And it's now sitting at roughly a 12year low.

If you'd bought and held Nike for over a decade, you'd have basically nothing to show for it. And this isn't just one unlucky year. Look at the losing streak. down 28% in 2022, down 7% in 2023, down another 28% in 2024, down 12% in 2025, and now year to date of 2026, it's down about 40%. That is year after year of losses and pain.

Has the market finally overreacted and handed us a gift? or is Nike's business truly permanently weaker than it used to be?

So, what happened to the mighty Nike? Well, it wasn't a recession or one bad shoe. It was a strategy that backfired. A few years ago, under its old CEO, Nike made a giant bet called direct to consumer.

The idea sounded smart. sell more shoes straight through Nike.com and Nike's own stores and less through other retailers like Foot Locker or Dick Sporting Goods. That way, Nike keeps more of the profit and owns the customer.

During co when everyone shopped online, it looked genius. That's one of the reasons the stock traded at such a premium in 2021.

But Nike pushed it way too far. It yanked its products away from the stores that had always sold them. And worse, it got lazy on new ideas, leaning on its old classic sneakers like the Air Force One and Dunk instead of inventing exciting new ones.

And while Nike was distracted, hungry competitors like On and Hoka came sprinting in and stole customers, especially in the running market. Nike share of the entire sneaker market slid from about 26% down to 23%.

Doesn't sound like much, but it's a big painful drop for the company that's supposed to lead the whole industry.

In just two years, Nike's yearly revenue from fell from about 51 billion to 46 billion. Its profit got nearly cut in half from 5.7 billion down to 3.1 billion. And its profit margin dropped from about 13% down to 8%.

This is not a case where a great business is untouched and only the stock fell. That does happen, but with Nike, the actual business really did get worse. And that's what makes this such a fascinating puzzle.

In late 2024, Nike brought in a company veteran named Elliot Hill as its new CEO. A guy who literally started at Nike as an intern decades ago. And his plan is basically to undo those mistakes.

He calls it win now and sport offense. In plain English, he's doing a few key things. Cleaning out old discounted inventory, making peace with the retail partners Nike had pushed away, and most importantly, refocusing the entire company back around actual sports like running basketball and stalker instead of just fashion and websites.

His whole belief is that Nike forgot that it's a sport company first. So, this is a real groundup rebuild of Nike's product engine, not just cutting cost.

The big question is, is it actually working? And here's the honest, complicated answer, sort of. It's a mixed turnaround, and that's exactly why the stock keeps whipsawing.

On the good side, Nike's biggest market, North America, actually grew 5% last year. And here's the number that really matters. Nike's wholesale business, which means they're selling through those retail partners that it abandoned before, jumped 14% in North America.

That's huge because it's direct proof that Hills make peace with the retailer's plan is working. Plus, its new running shoes like the Vimeo 18 are actually getting great reviews and selling very well.

Early proof that Nike can still make products that people genuinely want.

But on the bad side, Nike's business in China fell 13% and has now dropped for eight quarters in a row. That's a massive ongoing problem. Chinese shoppers are increasingly picking homegrown brands like Ant and Lee Ning over Nike.

And then there's Converse, which Nike also owns. Its sales have collapsed from about 2 billion to 1.2 billion in just two years, and its profits have almost completely vanished. an entire brand that went from real money-making to nearly nothing.

If you only look at North America and wholesale, Nike looks like it's roaring back. If you only look at China and Converse, it looks like it's falling apart. Both are happening at the exact same time.

This is not yet a clean, obvious turnaround. It's an inrogress one showing some positive signs.

does Nike still have a moat? that special durable advantage that protects a great business from competitors. And the answer is yes, but it's much weaker than it used to be. It's still ranked the strongest clothing brand in the entire world.

It owns Michael Jordan and the Jordan brand, a money printing machine that nobody can copy. It has deals with the biggest athletes on Earth, locked up with roughly 15 billion in future contracts. spends nearly five billion a year on marketing, runs a world-class sports research lab that most rivals can only dream of, and reaches customers through more stores than anyone else on the planet. That is incredibly hard to compete with.

But here's the catch. A shoe is not like stickier products. There's basically zero cost to switch. You can walk into a store and you can buy a Hoka or an instead of a Nike in a matter of two seconds flat.

So Nike's moat only works as long as people actually want its shoes more than the others. And as I mentioned earlier, they've already lost ground. That market share slipped three full points in just a few years.

History is full of famous brands like Kodak and Blackberry that everyone thought were untouchable right up until they weren't.

Is Nike's moat truly permanently damaged or was it just badly managed for a few years? Everything hinges on that. Elliot Hills fixing the exact mistakes that caused this, and the 14% jump in wholesale proves that Nike doesn't need to build anything new.

It just needs to switch its giant machine back on.

the early product signs are encouraging. New running shoes are getting great reviews and actually selling. Nike doesn't need one hit shoe. It needs a steady stream, but at least the pipeline looks alive again.

remember that margin drop we talked about from 13% down to 8%. Here's why that's actually exciting. If the business simply gets healthy again, profits could jump a lot without even needing huge sales growth.

That's a powerful hidden lever. We know Nike is capable of 13% margin. It's already done it in the past.

Nike may have permanently lost its cool factor. If shoppers now see it's just one good option among many, its old dominance may never fully return.

China might be a lasting problem, not a temporary dip, as local brands keep winning. this turnaround could take much, much longer than people hope. Designing, testing, and launching great new shoes can take years.

While the stock can drop in a single day, management itself is warning that next year will still be tough.

Both cases are genuinely strong and that is what makes Nike such a fascinating debate. in full transparency, I personally own shares of Nike. I started buying Nike at about $70 or $75 a share.

I don't remember exactly. And I've been dollar cost averaging down.

along the way, I've been selling cash secured put on Nike as it fell lower and lower. So my guess is that my basis is somewhere in the mid to high50s and I'm okay with that.

I know this is a turnaround bet. This is not a sure thing. But again, I look at Nike. I look at the brand that that they have the Jordan brand. They have LeBron James. They still have KD.

I go to the stores. I still see people clamoring for their shoes.

Yes. Their idea of moving away from the retailers probably wasn't a good idea. Which one, by the way, I agreed with. I thought to myself, this is great. Now they can spend that money that they save on marketing to get people to buy directly.

do I think Nike will be around 20 or 30 years from now? My answer is, yeah, I would be like shocked if somebody told me right now that Nike was gone in 20 years.

do I think they'll have higher revenue and profit 20, 30 years from now? My answer to that is also yes.

if the price is right today and I expect them to be around, I don't need the turnaround to happen next quarter, even next year. Do I think the turnaround will happen? My answer is yes.

is the price today giving me enough margin of safety that allows me to make a lot of money because I can be patient. most people jump to the price of the stock. I jump to the price of the company, $56.7 billion.

That's the market cap. The next thing I do is I go to their enterprise value. So 71.6. This $15 billion difference is essentially their debt.

Now, their free cash for last year was 2.2 billion. That means there's a lot of debt here relative to that. But if you look at their 5year average free cash flow of 4.3 billion, it's not as bad. it's only three and a half times their debt level.

So again, this is a turnaround in which their free cash flow is down significantly as they unload a lot of excess inventory that's not looking good.

5-year return on invested capital 17%. This is a quality metric on big companies like this, which has dipped to 12% in the last year, mostly because their free cash flow and operating income are down significantly.

Look at that profit margin. 9.6 9.5. those over the last 10 and 5 years and last year down. Why? Unloading that inventory. look at these revenue growth numbers. Absolutely terrible. 10-year growth rate of 3.7% a year. 5year is basically even and it's negative over the last 3 years.

We've seen this hit and we're hoping it turns around.

net income and free cash flow are down over the last five years, which we expected as part of this turnaround. The rest of it is check marks. And I love the fact that they're buying back shares.

Oh, it's actually actually about steady. Come on, Nike. Use that cash to buy back shares. Stop paying the stupid dividend. This is an absolutely useless dividend. 4.2%. Absolutely stupid.

Nike, if anybody knows anybody on the board of Nike, please punch them in the face for me and tell them that's from Paul because that needs to go away. If they're going to spend their cash on something, it's buy back those cheap shares.

if you look at their 5year free cash flow and 5year net income, they're selling for 12 times their 5year PE and 13 times their 5year free cash flow. For a for a quality company like Nike, that is cheap.

analysts have this company going from a$150 to $4 per share in profit over the next four years. Are they right? We don't know. but revenue back to growth from 46 billion growing to 58 billion in the next four years as well.

So they see a turnaround happening. The question is will they be right?

question is will they be right? So guys we have the story, we have the numbers, we put them together. Now this is our stock analyzer tool that we use to make assumptions about the future because that's what we're buying when we buy a company.

We're buying their future and it'll tell us what price to pay.

Now remember, it doesn't include the balance sheet. So, first I am doing a 10-year analysis. Next, what is my revenue growth for the next 10 years? Well, guys, I did three, five, and 7% revenue growth for the next 10 years.

Nothing crazy high, nothing crazy low. I really think that this is something that they can easily do as a company.

Next, what profit margin would I assign to them for the next 10 years? guys. They've had years of 12 or 13% profit, but overall, I'm being conservative and putting 9, 10, and 11% profit margin and free cash flow margin.

Next, what PE would I assign to this company 10 years from now? Not today, not an average for the next 10 years, at the end of 10 years. Well, guys, I consider Nike to be an above average company.

And if the average S&P company sells for 15 or 16 times earnings over its lifetime, I'm going to go with a premium to that because they have high returns on capital and it's Nike.

They're going to be around for a while. So, I put in 18, 22, and 26.

Now, guys, I know a lot of people are going to argue with this number. That's what's great. If you have the software, you can go in here and do it yourself. And then finally, my 9.5% market return.

This is not the price I want to pay for Nike. It's to say what is the intrinsic value of the business.

I have a low price of 46, high price of 100, middle price of 68. Guys, this means if my middle assumptions occur based on today's price, I can look at a 17.5% return. And that includes the dividend. So don't add the dividend on top of that.

Now, before I get into my personal return requirements, you just watched me walk through every number on Nike, the revenue, the margins, the earnings, the growth rates, and we plugged it all into our stock analyzer tool, and it told me what price to pay if I want to match the market.

But here's what I really want you to think about. Could you do that right now without this tool? If I just said to you, and not necessarily with Nike, any other company you wanted, I just handed you that one because I wanted to talk about it.

Now, since I started buying Nike, my personal returns have increased significantly on my requirements for investing. Why? Because, guys, I have a lot of things going on upstairs.

I have several businesses. 75% of my net worth is tied up in real estate and businesses. They're going to grow no matter what. So for me, I decided, you know what? In order for me to buy a company, I want to get a really high return just like I would get in in real estate.

This is my personal return of 15%. Now guys, I'm not saying that should be your return. It's for my personal return.

So, I hit the analyze button and guys, even for me personally, low price of 32, high price of 65, middle price of 46, it's still selling for in between the lowest number and my middle number. That's why I'm interested in Nike.

Now, I did start buying it at a much higher price than that before my return requirements changed, but as you can see, it still looks attractive at these levels based on my own assumptions.