The case of NIKE – NOT worth every price

Listen to this article

About two weeks ago, the stock of former darling Nike collapsed by 20%, something many thought could not be possible for a market leader. Especially, as Nike’s shares have fallen already by 40% from their all-time high at truly excessive valuations. But of course it’s possible, as a lower stock even by this margin is not automatically an attractive investment from a risk and reward perspective (sorry buy-the dippers). Today’s Weekly is a lesson about valuations and market behavior, something we need to remind ourselves all over again not to fall into valuations traps, no matter how bullish sentiment is.

Summary and key takeaways from today’s Weekly
– Sooner or later, valuations matter, because they show growth expectations.
– The market can remain too optimistic or pessimistic for longer than one thinks, but in the end, prices adjust to the reality of the underlying business.
– Even steep drops do not guarantee low valuations.

What I’ve been doing ever since I started this blog, is to look for stocks that are attractive to invest in (and the cases easy to understand). Besides either a growth story or a looming catalyst that can push shares higher (again), clean finances as well as an attractive valuation complete the whole picture for me.

An “attractive valuation” means first and foremost that success is not already fully priced in, effectively leaving no room for errors. The reason is that errors – faulty assumptions on my side or just changing growth dynamics – can completely fold together even a highly appraised stock which was seemingly only going up.

Even if it was going up for decades.

Investing is not based on the past (for those who’ve understood it, otherwise please take a look here, here and here), but on trying to assess the future development as accurate as possible. The good thing is, one does not need to hit the bull’s eye (or tripple 20), as being vaguely right is definitively preferable compared to being completely and precisely off track.

We’ve seen this year many companies from the consumer discretionary sector to crash brutally. They are selling products that are nice to have in an economic expansion, but left on the sides when money sits tight. I wrote about some examples a few weeks ago (see here).

Even if you don’t have any wiggle room, chances are still there for the stock to climb further, but the risks increase dramatically. A cold shower often follows if one gets caught on the wrong foot when for example growth starts to slow down or even reverse entirely.

This is what happened to bag stock holders of sports clothing icon and market leader Nike (ISIN: US6541061031, Ticker: NKE).

source: Steve Buissinne on Pixabay

I do not need to introduce the company too much, as everyone knows what they’re doing. Over the last decades, under minor corrections, the stock only knew one way: up and upper. It marked its all-time high towards the end of 2021.

Since then, it lost ~60% (–30% YTD), not counting dividends (which weren’t that much anyhow). Pretend quality-focussed investors with a fable for low, but rising dividends, used every 5% dip to load up more – because Nike is seen as a high-quality company.

While I do not want to start a debate on the side of their products, what has been completed left aside is the valuation of the business.

How can such a huge drop happen, especially as we didn’t have any broader stock market crash where everything gets sold recklessly to raise liquidity? Even during the market meltdown of 2008–2009, Nike’s stock fell by less than 50%.

When it’s not a broader market’s issue, something’s likely wrong under hood on a company level, either straight in the business or a great business was simply excessively valued by the market.

I want to use today’s weekly as a reminder for why valuations matter. Despite preaching this regularly, I do not get tired of another round.

The average total return of my best stock ideas is currently trailing the S&P500 and the iShares MSCI World. Most of the time, I was ahead and I am convinced this will be the case again.

For example, I have a case where an acquisition was just announced, though the gap to the takeover price is still 30%.

With my risks-first approach (paired with high upside), I am able to find stocks with great returns. Due to being convinced of my strategy and stock selection, I will continue to post frequent updates, no matter whether up or down in the short-term.

Join me and my members on our journey to beat the markets!

both as per 10 July 2024 market close – since August 2022

If you struggle to find high-quality stock ideas, let me inspire you. As a Premium or Premium PLUS Member, you receive my exclusive research reports with my best and market-beating stock ideas.

A case study on why valuation matters

Nike is today basically still what it was founded as: a shoe company, though of course it is selling all kinds of sports apparel and accessories.

The success story had a long endurance, culminating in an all-time high for the stock towards the end of 2021, as the following chart shows.

source: TIKR

TIKR only starts its charts in 2005, but already here we can see that from 2005–2021 the stock went up by a factor of 17x, not counting dividends. Even until today and including the huge price drop of almost 60% from the major high, the annual return is a stellar 11% (again without dividends).

On Seeking Alpha you can see a max chart from 1994, i.e. over 30 years, where the stock returned until today +3,785% – without dividends and already including the huge drop.

source: Seeking Alpha (see here)

This is – was – a huge success story by any means!

Every previous correction looks like a non-event in hindsight (an effect of compounding over the long-term), when we look at what happened over the last almost three years and especially since the start of 2024.

The story is quickly explained without having to do a too deep dive into the numbers.

Here is the long-term development of first total sales, then sales growth and finally operating income.

source: TIKR
source: TIKR
source: TIKR

Looking at these, we see a rather modestly growing company (usually mid-single digits growth rates) where the dynamic has started to slow down. Not just a bit, but to the lowest level in absence of the 2020 one-off special situation.

But that’s only half the truth.

While it is correct that the fiscal year’s 2021 high in operating earnings hasn’t been beaten, we know that it was a special year for many such discretionary businesses.

More interesting is that last year’s sales have been up only by a minuscule +0.3% – or negative, when adjusted even for government’s inflation numbers.

Then came the shocker during the earnings call that caught many investors on the wrong foot.

Here is a longer quote from the transcript with highlights emphasized by me (longer, though already shortened, to show you how I analyze and what I look for, but you can also read only the bold passages):

That said, this quarter we have been navigating several headwinds, which we now expect to have a more pronounced impact on fiscal 2025. Although the next few quarters will be challenging, we are confident that we are repositioning NIKE to be more competitive, with a more balanced portfolio, to drive sustainable, profitable long-term growth.

[…] First, after double-digit growth over the past several years, our lifestyle business declined in Q4 across men’s, women’s, and Jordan, more than offsetting strong growth in our Sport Performance business.

Second, NIKE Digital declined 10% in the quarter. Although our digital business has grown at an approximately 26% CAGR since fiscal 2019, we missed our Q4 plan on softer traffic, higher promotions, and lower sales of certain classic footwear franchises. More specifically, these franchises underperformed our overall digital business results in the quarter, especially in April and May, and continuing on into early June. This is even as these franchises continue to drive retail sales growth at high full price realization in multi-brand retail.

Third, we experience meaningful shifts in consumer traffic in key markets, particularly in Greater China, where brick-and-mortar traffic declined as much as double digits versus the prior year. We also continue to see uneven trends in EMEA and other markets around the world. […]

Now let me turn to our fiscal 2025 financial outlook. We are managing a product cycle transition with complexity amplified by shifting channel mix dynamics. A comeback at this scale takes time. With this in mind, we’ve considered a number of factors and scenarios in revising our outlook for fiscal 2025. Most importantly, this includes timelines and pacing to manage marketplace supply of our classic footwear franchises, lower NIKE Digital growth, especially in the first half of the year due to lower traffic on fewer launches, plan declines of classic footwear franchises given Q4 trends, as well as reduced promotional activity, increased macro uncertainty, particularly in greater China, with uneven consumer trends continuing in EMEA and other markets around the world, and sell into wholesale partners as we scale product innovation and newness across the marketplace and finalize second half order books. Taking all of this into consideration, we now expect fiscal 2025 reported revenue to be down mid-single digits, with the first half down high single digits. Foreign exchange headwinds have also worsened and will now have a one-point translational impact on revenue in fiscal 2025.

Nike earnings call transcript FY 2024 / Q4 2024 (see here)

As the presented results of the past weren’t convincing, the guidance for the next year of a shrinking business due to expected sales declines (likely also impacting earnings and cash flows), is barely bullish for the stock.

To be fair, this is not something only Nike is experiencing.

It is affecting many discretionary businesses which in nature are cyclical consumer companies (I think the word “cyclical” is key here to better understand it).

If you know all the above and then look at the valuation, you quickly understand why the stock – despite its huge drop – is still not really cheap.

As the balance sheet regarding the debt level is in relatively good shape, unlike the underlying business, I am using the equity market cap to free cash flow to get a glimpse for the valuation multiples over the last ten years.

source: TIKR

What we can see immediately, is that the stock by traditional measures, never really looked cheap with 20x being the lower-end range.

This wasn’t such a big issue for so long as the company posted frequent and reliable sales growth, accompanied by even disproportionately higher earnings increases which were supported through buybacks (sales +70%, earnings per share doubled, share count –13.5%).

And of course, China being a perpetual growth story which it isn’t anymore.

What is frightening, though, at the top the stock was valued at FCF multiples of 60–70x – sorry, this company cannot justify such a steep valuation. Including catch-up-effetcs from the lockdowns, sales growth peaked at ~20%, but besides, never was in that region. In normal times, this is a mid-single digits growth company.

At its peak, the market cap was 280 bn. USD – free cash flow at the top was 6 bn. USD, but it’s usually 4–5 bn. USD. Were I be pressed to give a quick guts-feeling fair market cap, my answer would be 100–120 bn. USD, based on a free cash flow of 4–5 bn. USD.

With the current 113 bn. USD on the clock, we could start discussing a fair valuation – but not if the business has headwinds and declining sales.

There’s still hardly any margin of safety, the more so if the company is coping with strong headwinds.

Under these circumstances, we honestly must be realistic and target 60 bn. USD – or ~40 USD per share which would be 12–15x free cash flow. Only then, there’s a chance that the hot air is completely out and expectations being pretty low. This would a scenario of low risk (though not no risk!) and decent upside.

The third thing that looks obvious on the valuation chart is that we are seeing the lowest multiple of the whole time period.

Of course, it is tempting to think that the stock is the cheapest now.

But is it?

The short answer is: no!

It is not, because a modest growth company has turned into a declining business, at least regarding the current outlook and tough environment it is in.

Cycles are known to run higher than thought – and to bottom out later than thought!

Basically having no margin of safety, but honestly being somewhere in no-man’s land, there’s no need to pull the trigger.

Or in other words: paying a 20x multiple (akin to a 5% FCF yield) does not compensate enough for the risk one is facing when thinking about an investment. You get 5% safely elsewhere (though I am clearly not favoring bonds).

What I want you to take home as lessons learnt are the following points:

  1. The market seems to think only about the next quarter or maybe fiscal year, but seldom beyond that when valuing companies (momentum vs. long-term thinking).
  2. In the short-term, valuations seem to matter less.
  3. Over- and under-exaggerations are always possible, but in the long run the market is right – no matter the past.
  4. High stock prices can always be justified by any silly argument for the headlines – but if a fish smells (excessive multiples compared to growth rates), it likely isn’t good anymore.
  5. Focus beyond the short-term, this will help you to sit tight when the market is temporarily going crazy, but also to leave when future success is already priced in (and much more).
  6. Even pretend quality companies or brands are not prone to suffering, as there is such a thing like a business cycle and companies have own life cycles.

If you are interested in little risk, but decent upside cases, then I urge you to risk a look into my latest research report for all my members.

I am discussing a conglomerate company which announced a break-up plan into several publicly traded entities. Even under very modest valuation assumptions of their investment portfolio, a break-up has the potential to help the stock advance higher by 50–100%.

my latest Premium idea


Sooner or later, valuations matter, because they show growth expectations.

The market can remain too optimistic or pessimistic for longer than one thinks, but in the end, prices adjust to the reality of the underlying business.

Even steep drops do not guarantee low valuations.

By becoming a Premium or Premium PLUS Member, you get instant access to all my already published research reports as well as several updates.

Likewise, you qualify for eight, respectively three more exclusive reports with my best investment ideas plus updates on the featured businesses over the next twelve months.

Premium PLUS Members also get access to all Premium publications.