3 Reasons Under Armour, Inc.'s Stock Could Fall

I've made no secret of my fondness for holding Under Armour (UAA -0.07%) stock as a long-term investment. After all, Under Armour's performance the past several years has proved to be nothing short of extraordinary, having recently capped its 17th consecutive quarter of at least 20% top-line growth. Shares are up 60% so far this year alone, trouncing the S&P 500's almost 10% rise over the same period.

At the same time, however, it would be foolish (with a lower-case "f") to believe any given business is without risk. There are no guarantees of success in the world of investing, so it's a great idea for shareholders to explore what could go wrong. Here are three reasons, then, that Under Armour's stock could fall:

One of the most effective ways for Under Armour to make its brand known is by sponsoring popular athletes and sports teams. Under Armour is still a relatively young company, but it has worked aggressively to position its logo alongside high-profile names such as Tom Brady, Lindsey Vonn, Bryce Harper, Georges St-Pierre, Michael Phelps, and Cam Newton.

 

But these deals don't come cheap. Earlier this year, for example, Under Armour persuaded the University of Notre Dame to leave behind Adidas (its sponsor of 17 years, by the way) with a fresh 10-year contract worth an estimated $90 million -- the largest in college sports history. And just last week, Under Armour was reportedly trying to lure NBA league MVP Kevin Durant away from Nike (NKE 1.10%) with a 10-year deal worth as much as $285 million. That figure included cash, an equity stake in the company, and a community center built in his mother's name.

 

Aside from the risk of overpaying, investors should ask what happens if a sponsored athlete or team becomes the subject of bad publicity. Take the U.S. speed-skating team, for example, which initially tried to blame Under Armour's high-tech skating suits for their sub-par Olympic performance earlier this year. Under Armour's name was ultimately cleared, and the company even brilliantly nipped the controversy in the bud by extending the sponsorship shortly thereafter. But if investors learned one thing, it's to be cognizant of the risk that a sponsorship can turn sour. 

But this also places Under Armour squarely in the crosshairs of global shoe behemoth Nike, which achieved $4.4 billion in sales -- yes, with a "b" -- from Nike Brand footwear alone over the same period. More than half of that number came from overseas consumers, thanks largely to Nike's extensive, efficient global supply chain. And you can bet Nike isn't afraid to use its deep pockets to do everything in its power to prevent losing market share as Under Armour attempts to expand from here -- even if it means resorting to tricky marketing tactics to dilute Under Armour's brand.

 

Of course, one might argue that Under Armour CEO Kevin Plank relishes the challenge, but it would be a mistake to underestimate the competitive power of Nike's brand across the globe. 

Global growth is expensive, complicated

 

That's not a deal-breaker for Under Armour's promising business. But investors need to remember that achieving substantial growth on a global scale will involve huge investments in manufacturing capacity, real estate, new distribution channels, and relationships to obtain sufficient volumes of raw materials. That's also not to mention the ever-increasing complexity of managing accounts receivable and inventory as revenue grows -- something with which Under Armour previously struggled, by the way, as domestic revenue skyrocketed a few years ago.

This doesn't mean I'll be selling my own shares of Under Armour anytime soon. To the contrary, though I fully expect bumps along the way, I still plan on holding Under Armour for decades to come. In the end, I simply think investors would be wise to keep a close eye on these challenges as Under Armour's long-term growth story unfolds.