Learn to Invest - Investors Grow 对 $NKE 的判断变化

In this video we're looking at Nike, ticker symbol NKE. So, Nike stock is down about 50% over the past year, and frankly a lot of this is deserved because we could see real quick on the Investors Growth website when we look at both the income statement and the cash flow statement, well, they're only getting one stars. These numbers are not doing well, and there's uh logical explanation behind it.

But, the real question is, do we have an investment opportunity right now? So, first we could see that they break out their revenue by product, which is 2/3 footwear, the other third athletic apparel. But, really their segments are broken down by region. So, most of their revenue is generated in North America, although they do they're a very well they're very big global company.

And China's actually been a problem recently because where they thought there was big growth in China, some of the growth numbers have declined a bit.

So, first, one important point I think we need to realize with Nike is that they don't manufacture their own shoes. Virtually all of their products are made by independent companies, most of them outside of the United States. I believe Indonesia is their biggest supplier of uh of products, but they do have operations, you know, they use uh manufacturing facilities all over the world as and they have hundreds of suppliers of product.

The good part about that is that they don't have to worry about that vertical integration. They don't have to worry about managing that part of the business. The bad part about that, and I think that this is a bigger one, is in a world where things are getting more customized and, you know, the delivery time is faster. Well, Nike's delivery time's actually been longer than most of their competitors over the past couple of years. And that hurts because now they've got to place an order a couple months in advance. It takes time to ship to wherever they're selling it, and then they put those that inventory on the shelf. And if times are changing quickly, if the next fad or the next, you know, in product comes and goes, you know, as it's been happening faster and faster. So, as that demand changes, well, it can affect the inventory that they have, and that could be an added cost. Again, it's it's more of I'd say points more to operational in operational inefficiency by doing it that way.

That's not even to mention uh the tariffs, and especially in the United States. So, they've only got about, you know, 3/4 I mean, 45% or so, a little more than a third of their revenue in North America. And if tariffs are if they have to pay tariffs to import the product from overseas, which they have paid a decent amount, that can hurt them.

Now, on the good side of what they're doing, they do have a massive amount of scale. They have a very strong brand, and that scale and distribution gives them a giant leg up over a smaller upstart type of company trying to compete against them. And that kind of gives them a moat ish a little bit of a moat.

This is a chart of their stock over the past decade. So, 10 years, and we can see when we look up at the returns, the returns have not been that good if you've owned Nike stock, especially over the past few years when the stock has tumbled since the end of 2021 into 2022, and it's really tailed off since then.

So, going back to 2021, 2022, coming out of the pandemic, well, coming out of that time, Nike began to push for their Let's say their direct-to-consumer business. They were pushing big for their digital transformation where they were going to sell directly to their customers and initially, out of the gate, it actually did fairly well. They were able to pick up a ton of sales from a from a online perspective, think nike.com. Even Nike's own independently owned stores. They have a whole bunch of independently owned stores and that's really where they were pushing.

And the problem was that this really pushed the narrative that Nike could become a direct-to-consumer faster growing company than they had been leading up to that and because of that, it kind of pushed the multiple much higher. So, when we got to this time period here, well, the numbers were the numbers were starting to support the trend, but it got really priced to perfection that called them a fast-growing, high-margin business that was going direct to consumer and the Nike brand was going to carry them through to the future. But, ultimately, obviously, as we can tell by the stock chart here, that didn't play out that way.

There was weakness in China that began to hurt them. They had some inventory issues and that inventory started ramping up. And the brand of Nike, although it had grown initially out of the gate coming out of COVID, well, that didn't that wasn't nearly as sustainable as they thought it was going to be and because of that, they began to run into a lot of headwinds.

Now, the shift in their marketing either their marketing idea was not all bad idea. It's actually a decent idea. You can go directly to the customer, allows you to make better profit margins. You're in control of the presentation and how, you know, how much you're selling the shoes for and where they get shipped to and all that stuff. You control a lot. You control customer data, all that information. But, Nike went too far with it. They drastically underestimated how much stores influence what people saw. So, people go over to their local Foot Locker or whatever shoe store they see, and they browse the shoes. Well, they might see a cool new Nike shoe that they hadn't seen before, and now they're interested and now they're buying it. Whereas, you would have to seek out the Nike brand on nike.com. The amount of additional marketing costs that would go to them selling exclusively ended up being a lot bigger than they expected, and they went way too far trying to They went way too far trying to go direct to the customer instead of allowing their long-built distribution network to carry them forward.

Now, one of the problems that they've ran into is that in going direct-to-consumer, they gave up shelf space to companies like Hoka or On, Adidas, New Balance. These companies have been gaining momentum. They have been picking up market share from Nike because Nike gave up some of their retail distribution to go direct-to-consumer, and at this point, they're trying to claw that back.

We can even see that in some of their recent numbers. Their Nike wholesale business over 20 in 2026 increased by about 4%. While Nike digital dropped by about 8%. Nike direct dropped by about 12%. So, they're right now they're in the middle of unwinding, let's say, a lot of mistakes that they made during this couple year downturn.

We should also point out that back in 2020, 2021 time period when they came up with their new business strategy. Well, they decided to folk focus less, in fact, they broke out their categories to be more like men's and women's and kids than it was by sports like they used to be. And that ended up becoming a problem because again, as they were letting competitors come in who were, you know, you were letting some competitors who were, you know, focusing very specifically on runners or specifically for football, things like that.

And frankly, they kind of over focused on brands like Jordan. Their Jordan brands is a massive brand, but then they were really over supplying it and a lot of people, I was reading through a whole bunch of comments on different threads talking about different shoes about how they saturated the supply and the scarcity that some of those shoes used to have weren't there anymore. And that, you know, kind of upset a lot of their customers.

Now, I don't want to make it sound like they suddenly started making bad shoes. That is simply not true. They do make a good shoe, but they slowed their own growth, they got in their own way, and early on during this highlighted period here, well, they were being priced as a high-flying growth company with big margins and it's shaken out that not only did that let's say that multiple have to drop, but they also lost some ground when it came to revenue or when it came to earnings per share.

In fact, this is a chart of revenue and we could see that it was climbing high and then over the past 2 years, not only did it drop, but it hasn't really grown at all. So, this kind of flies in the face of the high valuation. So, they kind of got hit twice. The value the multiple that the company was trading at had to be reduced because apparently it wasn't going to be a high-flying high margin company. And the actual earnings per share got hit.

So, again, all these all this data, by the way, is coming from the Investors Go website. Leave a link in the description below if you want to sign up to get access to that, but green bars are analyst estimates for revenue. So, we can see actual revenue dropped, has stayed there for about two years, and analysts have it kind of staying there, inching up over the next couple years. But, this turnaround story is going to take time. They did sufficiently mess up their, let's say, foothold as the leader enough to allow competitors to come in, and they're trying to get their ground back. Now, I do think it's possible that they get there, but for now, it looks like analysts are expecting revenue to gradually ramp up and not quite get to the high from a few years ago.

And then when we jump over and look at their operating income margins, well, this actually tells a very interesting story. So, obviously, COVID, bad year, lot of lot of things happened there. So, we'll give them a pass on that, but that's also when they made their shift to their new strategy. And you can see initially we saw a big jump in operating profit margins. So, that kind of spoke well to why the why the stock was ramping up as much as it was. But, since then, obviously, the numbers have gotten worse and worse, and this has flown right in the face of their higher margin business, their direct-to-consumer dream. And the numbers have drifted now. Now, it's been 2 years sitting near COVID-level lows without the, you know, COVID, you know. So, clearly, this is a problem, and this is why the stock has continued to tumble.

We've seen a very similar thing with earnings per share, not quite as dramatic on the way down, but earnings per share has also seen a decent drop-off. Now, the past 2 years, some of those I mean, we'll see where it goes because if uh I mentioned before the tariffs tariffs are a com- a cost that Nike will have to pay if they import shoes from overseas, and mostly they do. If they do that, they're going to probably have to pay tariffs on that, and that will lead to a higher cost. So, yeah, you're going to see that here. Uh you're that's going to at least that's another reason why the past couple years. Now, they did get some of that money back, but who knows where all that's going to go. Either way, earnings per share is down.

So, if we're thinking about this from a PE multiple standpoint, not only should the multiple multiple be lower because they're not as high-flying, fast-growing, high-margin business that we thought that they were going to be. So, what could have been a 30X company might be a 20X company now. Well, also earnings per share has dropped. That goes back to the double hit I was talking about before. And this has hurt a lot of things. Even something like free cash flow has been hurt as you know, the as the company has run into these issues.

Now, I left on the three-year average there because if we were kind of highlight the three-year average, we can see that although it ebbed and flowed for a while, it was broadly speaking trending higher. And that that is ultimately a good thing. But, it is very clearly over the past couple years broken that and heading lower. So, that is without a doubt a problem. That that's the reason that Nike stock is down 50% over the past year and it's down massive over the past, let's say, three or four years.

Now, another thing that not having as much cash flow is going to do for you is the company was buying back stock for a while. They've been a persistent buyer back of shares, which for investors is a good thing. Now, they have paused that because of all their cash flow problems. So, I think it would be wise for us to expect over the next couple years. It would actually be smart for them. Forget us wanting to do it. It would be smart for them not to buy back shares. Not at this price. Well, I mean, it would actually be logical to buy it in a more undervalued situation, but they should not be wasting their money on that. I'd much prefer them get their business in order. So, we can expect this to stay here for a little bit.

Now, to make sure we got all of our bases covered, one good part for Nike is that we can see here that this is Nike's debt versus cash and or cash and cash equivalents. And we can see they have plenty of cash. So, from a balance sheet perspective, they actually look perfectly fine. They have some debt, but they have more than enough cash to cover it. So, overall, this is again not a company that is right now being threatened to go out of business. That is by no means the situation. They're a turnaround business that have to spin their business around and they have started making strides towards towards that.

So, when we jump over and look at, let's say, the PE ratio of Nike stock going over the past decade, we can see that they do look a bit undervalued, at least relative to their own history over the past 10 years. But, based on the research we've done, the numbers might be a bit skewed because things went nuts in the middle there. It wasn't like this went nuts for a quarter or two. There was a few years where everything went a bit nuts. So, let's expand this chart. Instead of 10 years, let's go out 20 years. And when we do, well, suddenly we end up with a time period that I think is far more reasonable for us to consider. And that is, if we go back before they started making all those changes, before their company went absolutely nuts with, you know, the fundamental operational shifts that they were making, well, this PE range here, first of all, that's a fairly consistent range. And I think that that PE multiple range seems far more logical to me than where it is right now. If we include where it is right now, well, I mean, yeah, it's in the range, but I'd like to see this pull back a little bit further.

So, while I like where Nike's at from a value perspective, relative to their shifts and all that stuff, I think we need I personally think a slightly bigger pullback here. I mean, if I bought it here, I think it would probably be good for a long-term buy and hold it we're calling it a turnaround story. I do think it's a decent buy right here. But I think a really good buy would be closer to 15x. I think that would make it real interesting, especially if we can buy it at 15x when earnings per share is starting to ramp up.

Now, with that being said, I like to oftentimes use the second valuation method. Just kind of free cash flow for most companies tends to be my favorite valuation method, and we can see here we've got 5 years of analyst estimates, and although analysts do have free cash flow ramping back up, and this actually makes sense if we think about the fact that they are going more towards their wholesale business. They're trying to recover some of their shelves shelving space that they lost to competitors. Nike has the brand and the capability to get back in there, and the fact that they're going back there, I think is good. I think that's a smart move. So, I could I do think it's reasonable that free cash flow could ramp up like this.

Now, if it does ramp up like this, assuming analysts are anywhere near accurate, and by the way, they don't even have it ramping up to the old highs, you know, the highs from a couple years ago. They don't even have to get it back to that point. They just have a gradual increase. So, I do think that this could be slightly on the conservative end, but at these current levels, we could see the stock does in fact look undervalued right now.

The discounted free cash flow calculation for this would give us a fair value of about $50 per share. And to me, that is a That makes this one an interesting one because right now you're talking about a margin of safety about 29%. I do think that with that with that kind of margin of safety, with this type of company, with this brand, if I was just thinking about the Nike brand, yeah, this is a great buy all day right here.

But with the fact that this is going to take a couple years for them to turn this thing around and start showing consistent growth, and they, you know, we might be heading into a recession or might there's some obviously some economic issues out there. And that's not a great sign for spending money on a premium shoe brand like Nike. So, I think that could be a headwind.

So, for me on a personal basis, I like Nike. I'm going to be adding Nike to my bullpen.

And I'd like to see Nike stock to drop to about the 15X range. If that were to happen, and based on what the stock's done over the past year or two, it looks like it might just keep heading there. If it does, that would be an interesting time for me to jump in and buy this one. That would give me an even bigger margin of safety on top of the 29% we have right now. And it'll allow them to get closer to executing the plan.

So, this is going to be a company I watch, and it is the company I'm interested in buying, but let me know what you think about this stock in the in the comments below.