As a longtime shareholder of Under Armour (UAA -2.34%), 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 (LULU -1.26%) and Nike (NKE -0.74%).
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:
| Company | Revenue Growth | EPS Growth | Forward 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?
