To The Moon

$Nike(NKE)$ $Crocs(CROX)$

After navigating through a challenging environment with management changes and issues, particularly in the US, Nike is currently experiencing some of the lowest ratios in its history. This is definitely intriguing, but it’s likely to be temporary. A significant portion of these struggles can be attributed to broader market challenges affecting brands like Lululemon, Foot Locker, and even Laural. Additionally, internal changes under the new CEO could lead to improvements. Let’s dive into the details.

Over the past 12 months, the broader market has performed quite well, but one company, in particular, has faced significant challenges: Nike. The stock is currently down by about 31%, and over the last decade, it has notably underperformed the S&P 500, with just a 54% increase. Even in 2025, Nike has seen a 32% decline. This raises the question: Is Nike now dramatically undervalued, trading near its 52-week low of around $69? Or is this a great opportunity to add the stock to our portfolios?

Today, we'll explore this, including Wall Street’s view that Nike is a buy and the fact that it offers a dividend of approximately 2.19%. One individual particularly bullish on Nike’s prospects is Bill Ackman from Pershing Square Capital Management, who owns around 11% of the company and recently increased his position by 15%, adding 2.5 million shares. While it's important to consider expert opinions, we must also conduct our own due diligence and evaluate the company's valuation.

To provide some context, Nike’s Q1 2025 earnings show that most of its revenue comes from footwear, with a significant portion also coming from apparel. The men’s segment alone accounts for around 50% of sales. Nike, despite its global reach, has been under pressure to increase advertising and promotional spending, now totaling $4.3 billion. In fact, the CEO recently pointed out that retailers have had to offer more promotions, resulting in a decline in both revenue and profit. Although the company has relied on promotions to drive sales, this strategy has not been enough to sustain growth.

Despite the challenges, Nike remains a fundamentally strong company with solid margins and profitability. The key question is whether stagnating revenue in a tough environment is acceptable or not, which I’ll explain shortly. Nike has the potential to thrive even in this environment, but much of it comes down to management decisions. The company can generate a solid $5-6 billion annually, which is impressive for a $100 billion market cap, especially for Nike. It’s important to note that Nike is trading at less than 20x cash flow, the lowest point since 2010. If they can reignite growth, this could translate into a significant 50-100% upside, but more on that in the valuation section.

From a financial standpoint, Nike is in a strong position, with current assets nearly covering total liabilities. While the equity is less relevant for a company like this unless they decide to include it in Goodwill (which they haven’t), we can see that the brand itself is incredibly valuable, with recent estimates placing its worth at $71.6 billion—close to the current market cap. However, this is more subjective and depends on potential buyers, though it’s unlikely for someone like Louis Vuitton or Lululemon to make a move. Overall, the balance sheet is very healthy, which is a positive.

A major risk for Nike is the intense competition. The brand is undoubtedly the most powerful in the industry, but with so many other players, even if they grow and falter, the market remains tough. Take Lululemon, for example, which now generates 20% of Nike's revenue and cash flow—amounting to a significant sum that Nike is missing out on. This is especially concerning when considering that Nike could have acquired other fast-growing brands but didn't. Nike’s brand loyalty is strong, but its organic growth potential is somewhat limited. Given how massive Nike has become, acquiring new customers sustainably is challenging. In contrast, Lululemon carved out a niche and grew from it, and Nike, with its resources, could have done the same with any niche. They can still grow through acquisitions, but the previous management missed opportunities.

With the new CEO focusing on repairing relations with retailers and cutting back on discounts, there’s hope that Nike will take a more strategic approach. Acquisitions might also become a part of the plan, which could stimulate growth, but the question is how much more Nike can expand when they’re already everywhere. On the bright side, unless they damage the brand (which is unlikely), the company should have relatively stable and safe revenue and profit. With rate cuts and a recovering global economy, demand should bounce back, and growth in line with inflation plus a little more should be achievable. That’s likely enough for Nike to maintain its position, even though they’ve never had explosive growth.

A significant issue for Nike is tariffs. Despite diversifying into countries like Vietnam and Indonesia, China remains a key production hub. Nike faces challenges with this setup, especially with the US market being crucial for them. Any changes to their supply chain could increase production costs. While they can use Chinese production for exports, local suppliers may be needed for the US market, which would come at a higher cost.

Lastly, Nike is currently doing large buybacks and paying a 2% dividend, returning much of its profits to shareholders. This strategy is similar to what we see with companies like PayPal. The new CEO’s approach will be interesting—whether they focus on investments and reduce buybacks, or double down on buybacks. Given the tough environment and lack of growth over the past five years, it may be a good time to focus on buybacks, but how they move forward remains to be seen. The CEO has indicated that raising the stock price is a priority, but with many potential strategies, the short-term market reaction remains uncertain.

Nike has expressed the goal of transitioning its online business to a full-price model, but this will take time, and the company must aggressively liquidate old inventory, which leads to less profitable sales channels and more discounts. This approach, while necessary, is negatively impacting short-term financials.

In terms of digital sales, Nike has been experiencing a 50/50 split between full-price and promotional sales. This shift is especially concerning as it has affected gross margins, which are expected to decrease by 3-3.2%. They also forecast low double-digit declines in sales, which is worse than analyst expectations.

However, in their latest quarter, Nike did outperform on key figures, with earnings per share (EPS) coming in at 78 cents versus the expected 63 cents, and revenue of $12.35 billion, slightly exceeding estimates. Despite this, net income for the quarter fell to $1.16 billion, down from $1.58 billion in the same period last year.

Management has a good track record of exceeding analyst expectations, having beat forecasts in all four quarters of the past year. However, they anticipate a decline in EPS for the next four quarters, with a forecasted EPS of $2.06 for May 2025. This suggests that, despite the stock’s recent decline, Nike is trading at a forward P/E ratio of 30.2, which is relatively high when compared to the sector average of around 17.

Nike’s valuation is high across various metrics, and their growth is rated poorly with a D-minus. Their year-over-year sales growth is down by 5%, and analysts predict further declines in the top line, with a 3% drop expected. The company’s EPS growth forecast is also disappointing, at just 2.5% over the next 3-5 years, which is lower than the sector and historical averages.

In a challenging environment with competitive pressures, potential scandals, or CEO issues, let’s say Nike can reach $4 billion in annual profits. In this case, a price-to-earnings ratio of 15 would still be reasonable, as anything lower might make it an attractive target for acquisition. This would result in a market cap of $60 billion, corresponding to a share price of $40.56—representing a potential 40% loss. However, with the dividends and buybacks, the loss becomes much less significant, so it's not as concerning.

In a more favorable scenario, where tariffs stabilize and the economy improves, let’s assume Nike can consistently generate $5 to $6 billion annually in the long term, with the market applying a P/E ratio of around 20. This would lead to a market cap of $110 billion, and a share price of $74.37, which is quite close to the current price. With dividends and buybacks factored in, the theoretical yield would be around 5-6% per year, which isn’t extraordinary.

In an even better environment, where Nike acquires another company and sees improvements, let’s assume they can reach $7 to $8 billion in profits, and the market values them at a P/E ratio of 30. This would imply a market cap of $225 billion, resulting in a share price of $152.12. This would represent a 28% gain, with additional upside potential due to buybacks. In this scenario, they could also retire shares, enhancing value further.

On the profitability front, Nike scores an A+, with gross margins of 45% (better than the sector’s 38%) and a bottom-line margin of 10%, also superior to the sector’s low single digits. Cash from operations is another area where Nike excels, with $6.12 billion, far outpacing the sector's $288 million and surpassing its own 5-year average of $5.4 billion.

In terms of total returns, including dividends, Nike has been the worst performer in its footwear sector over the past year, down 30%, while most other companies in the same space have seen positive returns.

Now, let’s dive into our valuation for today, which stands at $85. This figure is the average of the three models we’ve used, and we’ll walk you through how we arrived at it. First, we have the multiple valuation method, where we compared Nike to similar companies in terms of sector and size. By applying the average P/E to Nike’s EPS, we get our first intrinsic value, which signals overvaluation. However, remember, we don’t rely on any of these models in isolation.

Next, we used the dividend discount model, factoring in the yearly dividends. With an average growth rate of just over 10%, we’ve taken a more conservative approach moving forward with a 6.25% growth rate. This gives us our first undervaluation signal with an intrinsic value of $97. Then, we move on to the DCF model, considering free cash flow. Over the past year, the average growth rate has been around 36%. We’ve taken a more conservative 5% growth rate going forward, and after applying a discount rate and adding the present value of future cash flows and terminal value, while subtracting total debt, we arrive at an intrinsic value of $99.

So, the intrinsic value is the average of these three models. If you’d like to review or adjust the numbers, you can grab a copy of the model from the pinned comment below and run your own calculations, whether for Nike or any other company.

We’re not done yet, though. We always factor in a margin of safety (MOS), starting at 10%. We’d consider buying if a stock meets our three golden criteria: a wide moat, strong financial metrics, and good forward-looking data. Based on our calculations, we see the buy price at around $77. We keep adjusting that until it aligns with the current trading price. As of today, we see a 15% MOS, and Wall Street’s target is $87 for the next year, indicating a 19% upside.

However, a 15% MOS isn’t quite enough for us to make a move. Given the short-term challenges this company faces, like the uncertainty around promotions and increased marketing spend, we’d prefer a higher margin of safety. For those who are targeting a 20% MOS, the buy price would be $66.80, for 25% it’s $64, and for 30% it’s $60.

Conclusion

Overall, Nike remains a solid company with significant profit potential. If managed well, there’s real growth potential. I’m closely watching this stock and think it could soon be a good buy for me. If the price drops to the $50-$60 range, I’d consider adding to my position, as this would provide a strong margin of safety. Nike’s healthy and powerful brand puts it in a position to take advantage of the current environment. By focusing on acquisitions or other growth strategies, Nike could easily return to previous valuations, offering a quick profit opportunity along with long-term potential.

As always, the information provided here should not be the sole basis for any investment decision. Please do your own research before investing in any company. If you enjoyed this video, don’t forget to leave a like, comment, and subscribe for more. Thank you for watching, and I’ll see you next time!

What are your thoughts? Is this a buy, hold, or sell for you?

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Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.