Nike is one of the most recognizable brands globally, consistently ranking among the 100 most well-known and valuable brands worldwide. Additionally, the company operates in an industry benefiting from positive tailwinds, as healthy lifestyles are increasingly being embraced around the world. However, a strong brand presence and a favorable industry position do not necessarily equate to a good investment. In this analysis, I will provide my assessment of Nike as an investment opportunity.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in Nike. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of Nike's either. Thus, I have no personal stake in Nike. If you want to purchase shares (or fractional shares) of Nike, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $100.
Nike is a company that most people are familiar with. It was founded in 1965 as Blue Ribbon Sports and later changed its name to Nike in 1971. Nike engages in the design, development, marketing, and sale of athletic footwear, apparel, equipment, accessories, and services worldwide. The company offers a wide range of athletic and casual products under various brands, including NIKE, Jumpman, Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell. Additionally, Nike sells performance equipment and accessories such as bags, sports balls, socks, eyewear, timepieces, digital devices, bats, gloves, protective gear, and other sports equipment under the NIKE brand. Nike's primary revenue drivers are footwear, which accounted for approximately 68% of its revenue in fiscal year 2024, and apparel, which contributed about 28% during the same period. The company's products are sold through two main channels: wholesale (56%) and Nike Direct (44%), which includes Nike-owned retail stores and online sales. North America remains Nike's largest market, generating 42% of its revenue in fiscal year 2024. Nike is recognized as one of the most iconic brands globally, with its name and the Swoosh logo being instantly recognizable to consumers worldwide. This global recognition reinforces Nike's position as the top brand for athletes and sports enthusiasts. As the leader in the global athletic market, Nike's scale and extensive reach provide opportunities for impact at a level unmatched by its competitors. This brand strength and market dominance form the basis of Nike's significant moat.
John Donahoe has been the CEO of Nike since January 2020, having previously served on Nike's Board of Directors since 2014. Before assuming the role of CEO at Nike, he was the CEO of ServiceNow and eBay. He also served on the Board of Directors of PayPal Holdings, Inc. from July 2015 to July 2024, ServiceNow from March 2017 to June 2020, and Intel Corporation from March 2009 to May 2017. John Donahoe holds an MBA from Stanford Graduate School of Business and a bachelor's degree in economics from Dartmouth College. There are several compelling reasons why Nike selected John Donahoe as their CEO, beyond his extensive credentials. E-commerce is a strategic priority for Nike’s future growth, and John Donahoe's experience as the CEO of eBay makes him particularly well-suited to lead this initiative. Furthermore, given Nike's ongoing efforts to address the fallout from a sexual harassment scandal in 2018, John Donahoe's record of promoting women to leadership positions through the Women's Initiative Network at eBay could help improve Nike's reputation over time. However, Donahoe's tenure at Nike has not been without controversy. In 2024, despite record losses and a significant decline in stock prices, he made the decision to cut 15% of Nike's employees in Oregon, while his compensation remained among the top 0,1% of the top 1% of all CEOs in the United States. Moreover, under his leadership, Nike's stock experienced its worst performance ever, dropping nearly 20% following the earnings report for fiscal year 2024 and the guidance for fiscal year 2025. Despite these challenges, Nike founder Phil Knight has expressed his "unwavering confidence and full support" for Donahoe. While Donahoe has the appropriate credentials to lead Nike, his recent performance raises some concerns. Therefore, I believe there is some uncertainty regarding Nike's current leadership.
I believe that Nike has a strong moat. However, I believe there are some uncertainty regarding the management, and I will monitor management moving forward. Now, let us investigate the numbers to determine if Nike does indeed meet our criteria for a strong moat. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.
The first metric to examine is the return on invested capital (ROIC). We require a 10-year history with all figures exceeding 10%. Nike has consistently demonstrated strong financial performance over the past decade, with its ROIC never falling below 10% and dipping below 15% only twice. One of these instances occurred in 2020, when the global lockdowns impacted many companies, including Nike. It is encouraging to note that the ROIC reached its highest level since fiscal year 2021 in fiscal year 2024, which may be a positive indicator for the future. Overall, the figures are impressive, as Nike has maintained a ROIC above 10% each year over the past decade and achieved a ROIC above 20% in eight of those ten years. These results suggest that Nike is a high-quality company with strong financial fundamentals.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the percentage growth year over year. Nike has experienced some challenges, particularly during the pandemic, when equity dropped to record lows. While the figures before the pandemic were somewhat concerning, it is reassuring to see that Nike achieved record equity levels following the pandemic. Although there was a slight decline in equity in fiscal year 2023, this was likely due to the broader macroeconomic environment. Nike successfully grew its equity again in fiscal year 2024. While the equity has not returned to its all-time high from fiscal year 2022, it is noteworthy that it reached its second-highest level ever in fiscal year 2024.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Nike has consistently generated positive free cash flow every year, which is not surprising given its market position. Free cash flow grew steadily from 2018 to 2021, with the exception of the lockdown year in 2020. While there was a decrease in free cash flow in fiscal year 2022, it increased again in fiscal year 2023 and once more in fiscal year 2024, when Nike achieved its highest free cash flow to date. The increase in fiscal year 2024 was driven by significant improvements in working capital, such as an 11% reduction in inventory compared to the prior year, among other factors. The levered free cash flow margin has been mixed over the past decade; however, it is encouraging that Nike recorded its second-highest levered free cash flow margin in the past ten years in fiscal year 2024. Additionally, the free cash flow yield is at its highest level in the past decade, suggesting that the shares may be trading at an attractive valuation, a factor that will be revisited later in the analysis.
Another important aspect to consider is the level of debt and whether it is manageable within a three-year repayment period. This is typically assessed by dividing the total long-term debt by current earnings. For Nike, this calculation shows that the company has 1,39 years of earnings in debt, indicating that its debt level is manageable. Therefore, debt does not appear to be a concern from an investment perspective. Moreover, Nike has not had more than three years of earnings in debt at any point over the past twenty years, suggesting that it is unlikely for debt to pose a significant risk in the future.
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Based on my research thus far, I find Nike to be an intriguing company. However, like any investment, there are risks associated with investing in Nike. One of the primary risks is competition. Nike operates in a highly competitive industry, facing established brands such as Adidas, Puma, and Under Armour, as well as new and emerging companies. Given the relatively low barriers to entry in the athletic apparel and footwear market, Nike must continuously innovate to differentiate itself and maintain its competitive edge. The company also encounters significant digital competition, necessitating the delivery of compelling online and in-store digital experiences to attract and retain consumers who are increasingly inclined toward online shopping. The evolving consumer preferences and the growth of digital commerce require Nike to adapt its strategies continuously. A failure to do so could result in declining sales or necessitate price reductions, adversely affecting profitability. Moreover, strong brand perception and consumer engagement are essential for sustaining market share and customer loyalty. A decline in these areas could lead to a loss of market position. Price competition also poses a challenge; should competitors offer superior or more affordable products, Nike may be compelled to lower its prices, thereby compressing margins. Another risk for Nike is its exposure to various economic risks due to its extensive global operations. Fluctuations in inflation, interest rates, and foreign exchange rates can significantly impact the company's revenues, costs, and profit margins. Since a substantial portion of Nike's products are manufactured and sold outside the United States, the company is particularly vulnerable to currency fluctuations that can lower the value of foreign sales when converted to U.S. dollars. A stronger U.S. dollar can reduce reported earnings, while inflationary pressures and central bank policies, such as interest rate hikes, can increase operating and borrowing costs. Recent economic uncertainties, especially in Greater China, have led to declining consumer traffic and uneven trends in other markets, such as Europe, the Middle East, and Africa (EMEA). Moreover, foreign exchange headwinds have intensified, further impacting Nike's revenue and overall financial performance. While Nike employs hedging strategies to manage some currency exposures, these measures only partially mitigate the effects of currency volatility. As a result, the company's future financial results could still be significantly affected by shifts in currency values. Another significant risk for Nike is the potential inability to anticipate and respond to changing consumer preferences. Nike's success heavily depends on its ability to continuously identify and develop products that align with evolving market trends; however, this is inherently challenging due to the unpredictable nature of consumer behavior. If Nike fails to accurately anticipate these shifts or adjust its product offerings in a timely manner, it could experience a decline in sales as consumers turn to competitors. Such misalignment with consumer preferences can also lead to excess inventory, resulting in costly markdowns and reduced profit margins. Repeatedly missing emerging trends could damage Nike's brand perception, eroding consumer loyalty and market share. Additionally, marketing plays a critical role in shaping consumer preferences. If Nike's marketing campaigns fail to resonate with its audience or become increasingly expensive, the company's ability to effectively promote its products may be compromised. Overall, an inability to keep pace with changing consumer trends could result in declining revenues, increased costs, and weakened profitability, posing a significant risk to Nike's financial performance and market position.
There are also several compelling reasons to consider investing in Nike, one of which is its strong emphasis on innovation. Innovation is a core driver of Nike's growth strategy and differentiates the company from its competitors. Under the leadership of CEO John Donahoe, Nike has fostered a culture of innovation, resulting in the development of groundbreaking products such as Dri-FIT, FlyEase, and Nike Forward. This focus on innovation not only distinguishes Nike from its competitors but also reinforces its market position. Nike is accelerating its innovation pipeline through initiatives like "Speed Lane," which utilizes digital tools and strategic partnerships to expedite product development and market launches. This approach enhances Nike's ability to respond swiftly to consumer trends, thereby driving sales growth and increasing market share. The company's plan to double the contribution from new products by the end of fiscal 2025 reflects its confidence in its capacity to innovate and scale effectively. Furthermore, Nike is balancing its focus on both performance and lifestyle innovations, exemplified by products like the Alphafly 3 for runners and new versions of classic models such as the Air Jordan 1 and Dunk. By leveraging its heritage while introducing fresh, innovative products, Nike continues to drive consumer demand and foster brand loyalty. This relentless commitment to innovation is expected to position Nike for sustained growth in the future. Another reason to consider investing in Nike is the strength of its performance and sport segment. Nike is experiencing significant growth across key categories such as basketball and running, driven by successful product launches and strategic endorsements. For example, Nike's basketball segment, which includes new lines like the Sabrina 1, has achieved double-digit growth, while its running category continues to perform well with popular releases such as the Pegasus 41 and Vomero models. In addition to Nike's strategic focus, broader industry trends provide favorable tailwinds. There is a growing global emphasis on sports and healthy lifestyles, evident in markets like China, where wellness is becoming increasingly prioritized. The concept of sport is expanding beyond traditional settings like gyms and sports fields, with individuals engaging in fitness activities in diverse environments. Furthermore, the boundary between sport and lifestyle is becoming less distinct, as consumers increasingly seek performance gear and sport-inspired fashion for everyday wear. These trends, combined with Nike's leadership in performance categories and its commitment to capitalizing on sport-specific growth opportunities, position the company well to capture market share and sustain long-term growth. Another reason to consider investing in Nike is its strategy to rebalance its product portfolio. Nike's approach to rebalancing involves tightening the supply of certain classic footwear franchises, particularly on its digital platform, where these products have a strong market presence. While this strategy may pose short-term revenue challenges, it enhances the brand by maintaining a balanced mix of performance and lifestyle products, as well as premium and more accessible offerings. This keeps Nike's product assortment fresh and appealing, driving consumer demand. Nike has a proven track record of success with similar rebalancing efforts. For instance, in 2018, the company adjusted the supply of key Jordan products, which transformed declining sales into several years of double-digit growth. More recently, Nike recalibrated its lifestyle footwear offerings in Japan and Korea, successfully regaining market leadership. By carefully managing supply, Nike preserves the exclusivity and appeal of its franchises, ensuring high levels of full-price sales and profitability. This disciplined portfolio approach allows Nike to build anticipation for new releases, sustain brand momentum, and capture consumer interest, positioning the company well for sustained growth.
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Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 3,73, which is from fiscal year 2024. I have selected a projected future EPS growth rate of 15%. Analysts expect EPS to grow by 16,10% in the next five years, but 15% is the highest number I use. Additionally, I have chosen a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on the fact that Nike has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $111,90. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Nike at a price of $55,95 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% annually, and I calculate it as follows: The operating cash flow last year was 7.063. Capital expenditures were 868. I attempted to review their annual report to ascertain the proportion of capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated for maintenance purposes. This means that we will use 608 in our calculations. The tax provision was 1.000. We have 1.503 outstanding shares. Hence, the calculation will be as follows: (7.063– 608 + 1.000) / 1.503 x 10 = $49,60 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Nike's Free Cash Flow Per Share at $4,38 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $69,14.
I believe that Nike is a strong company with a significant competitive moat. However, there are some uncertainties regarding its management, and I believe that the actions of the management will need to be closely monitored moving forward. Nike has consistently delivered a high ROIC over the past decade, demonstrating its quality as a company. Additionally, Nike has recently achieved its highest free cash flow to date, which is an encouraging sign. Nonetheless, competition presents a considerable risk for Nike, given that it operates in a crowded market with both established and emerging competitors. The company must continually innovate and adapt to shifting consumer preferences and digital trends; failure to do so could result in declining sales, reduced margins, and loss of market share. Nike's global operations also expose the company to various economic risks, including currency fluctuations, inflation, and changes in interest rates, which can negatively affect revenues, costs, and profitability. This is particularly relevant in key markets like Greater China and EMEA, where economic uncertainty persists. Another risk is Nike's potential inability to anticipate and respond to changing consumer preferences. This could lead to lower sales, excess inventory, reduced profit margins, and a weakened brand perception, ultimately impacting its revenue and market position. However, there are compelling reasons to consider investing in Nike. One key factor is the company's strong focus on innovation. Nike's commitment to developing groundbreaking products and accelerating its innovation pipeline sets it apart from its competitors. The performance segment also presents a strong investment rationale, as the company is experiencing significant growth in key categories like basketball and running, driven by successful product launches and favorable industry trends, such as the increasing global emphasis on healthy lifestyles and the merging of sport and fashion. Nike's strategy to rebalance its portfolio by tightening the supply of key products also strengthens its brand by maintaining a balanced mix of offerings, driving consumer demand, and sustaining profitability. This approach has been demonstrated to be effective, as seen in the company's successful efforts to regain market leadership and boost growth in the past. While there are some uncertainties surrounding Nike, it remains a high-quality company. I believe it could be a sound long-term investment if shares can be acquired below the Payback Time price of $69.
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