Why Under Armour's Valuation Doesn't Matter

With a skyrocketing share price, Under Armour has come under fire for having an expensive valuation. However, considering the company's long-term potential, valuation should be cast aside in favor of a superior growth story.

Mar 1, 2014 at 7:00AM

As a longtime shareholder of Under Armour (NYSE:UA), even I have to admit the company's recent stock appreciation has been nothing short of amazing, perhaps even a little scary. Shares of the apparel, footwear, and accessories maker have skyrocketed more than 140% in the last year and more than 30% since January alone.

With such incredible outperformance, investors now must consider whether the Baltimore-based company still makes for a viable long-term growth investment. The decision becomes even harder when Under Armour is viewed alongside much cheaper competitors like lululemon athletica (NASDAQ:LULU) and Nike (NYSE:NKE).


Source: Company Facebook Page

The next Nike?
If you follow Under Armour at all, you have most likely heard the company referred to as 'the next Nike.' While being compared to the world's current dominant athletic brand and one of the most successful growth companies of all time is surely a compliment, it helps to know what analysts and investors actually mean when they call Under Armour 'the next Nike.'

The most obvious meaning of the reference is that Under Armour could one day become the size of Nike, which would be very impressive considering Nike's current market capitalization of $68.8 billion and Under Armour's $12.3 billion. In order for Under Armour to achieve a valuation of that size, the company's revenue stream would have to grow enormously, probably close to the $25.3 billion Nike generated in fiscal 2013. For comparison, Under Armour generated only $2.3 billion in sales in fiscal 2013.

Although some of these comparisons are enough to make investors' heads spin, it is important to remember that it took Nike more than five decades to achieve its current valuation and sales capability. Meanwhile, Under Armour was only founded in 1996 by CEO Kevin Plank in his grandmother's basement.


Source: Company Facebook Page 

The next Nike-type brand?
To me, when people in the investing community refer to Under Armour as 'the next Nike,' they are referring more to the possibility that the UA logo can one day carry the global weight and prestige that the Nike swoosh currently carries around the world.

While very much a dominant force in the American sports landscape, Under Armour is nowhere even close to matching Nike on a global scale. Currently, only 8% of Under Armour's total revenue is generated from international businesses. This is a very small amount, especially when compared to Nike, which derived approximately 54% of total Nike Brand revenue from international markets in its most recently reported quarter.

Valuation is crazy and here's why
The following is a breakdown of Under Armour's projected growth and forward-looking valuation for 2014 compared to that of smaller competitor Lululemon and global titan Nike:

CompanyRevenue GrowthEPS GrowthForward P/E
Lululemon 15.9% 16.4% 23.8
Nike 9.6% 11.2% 22.4
Under Armour 23.7% 23.3% 49.8

*Lululemon's fiscal year ends in January; fiscal 2015 is represented
*Nike's fiscal year ends in May

Although Under Armour is projected to be the clear leader out of all listed peers in terms of both revenue and earnings-per-share growth, its valuation is also twice as expensive as its competitors'. So, what are we as investors to make of this?

My answer is easy to understand but hard to justify. I am in the camp that believes Under Armour is well on its way to becoming the next Nike, which is to say both a truly global athletic-sports brand and a retail powerhouse. Therefore, as crazy as it may seem to some, I see the absolutely ridiculous valuation levels of Under Armour's stock as the ultimate sign of confidence by investors in the company's future potential.

Only a company that is on the verge of changing the sports/retail landscape would be afforded such extreme valuation levels. What's more is that everything company management is doing seems to back up my thesis. Under Armour's expansion into new product categories like wearable technology, growth in female and youth product lines, and increasing footprint in China are all early indications that the company's aspirations are growing significantly larger.


Bottom line
If the company's growth trajectory remains steady, Under Armour could very well become the next Nike and be a once-in-a-lifetime investment. Accordingly, Under Armour is a stock that I believe investors can hold forever, but do Motley Fool analysts agree?

Read about the three forever stocks now
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Philip Saglimbeni owns shares of Under Armour. The Motley Fool recommends Lululemon Athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information