Under Armour: Part Nike, Part Amazon.com

Even after years of significant growth, Under Armour is still in the early days of a tremendous growth story.

Jun 17, 2014 at 6:25AM

Investors often compare Under Armour (NYSE:UA) and Nike (NYSE:NKE). This makes perfect sense, since both compete directly by selling growing arrays of athletic apparel, footwear, and even wearable-computing products. However, investors who look at the valuation of each company side-by-side and conclude that Under Armour's stock is overvalued at a forward earnings multiple of 49 compared to Nike's 22 are missing a number of key considerations.

The growth and innovation that has been under way at Under Armour in recent years has shown no sign of slowing down. With consistent growth rates of 20% or more and a constant focus on improving the customer experience, Under Armour is more comparable to retail innovator Amazon.com (NASDAQ:AMZN) than it is to other apparel manufacturers. If Under Armour needs to be compared to competitors like Nike, it should be compared to Nike circa 1990, when Nike was at a similar point in its growth cycle and just crossing the $2 billion in annual revenue mark.

A focus on innovation and the customer
Under Armour is unique among apparel manufacturers in the emphasis it puts into technology. In the most recent earnings release, CEO Kevin Plank highlighted innovation as a primary driver in the company's 36% increase in revenue:

Our formula for driving newness and innovation in Apparel continues to resonate with consumers and helped deliver over 30% growth for our largest product category. That same model is contributing to success in Footwear, where we accelerated growth in running and brought award-winning product to the marketplace with the SpeedForm Apollo.

This innovation goes far beyond the expansion into new lines of athletic gear; Under Armour takes pride in developing differentiated products that have noticeable impacts on athletes' performance. Sound familiar? What Under Armour is accomplishing with high-tech t-shirts is exactly the same type of disruption for which Amazon.com has gained recognition as the most innovative retailer in the world.

Both Under Armour and Amazon.com relentlessly focus on customer service. Under Armour's customer satisfaction mantra says it all: "Our Mission is clear: Make All Athletes Better. If you're not 100% satisfied with your gear, exchange or return it for a refund. Anytime. Any reason. Guaranteed." This focus, combined with countless anecdotal feel-good stories, show exactly how customer-centric the company is. Just like Amazon.com's Prime membership, this customer-first mentality creates a growing army of loyal customers.

Tremendous revenue growth
The combination of innovation and customer service has a very real impact on the top-line growth of Under Armour and Amazon.com. Revenue growth for both companies has been multiple times those of larger, established rivals:

UA Revenue (Annual YoY Growth) Chart

UA Revenue (Annual YoY Growth) data by YCharts

The growth opportunities for Under Armour are just as diverse as they are for Amazon.com. In addition to constant innovation within its existing product lines, Under Armour has the potential to continue its significant expansion in direct-to-consumer, or DTC, and international revenue. During the first quarter, DTC revenue increased 33%, while international revenue grew 79%. Under Armour is also taking a leading role in wearable computing and fitness tracking software with its Armour39 line and the 2013 acquisition of Map My Fitness; both figure to be important assets with significant growth expected in wearable computing over the next several years. 

A growing series of partnerships with professional sports teams, college athletic organizations, and popular athletes will also help fuel further growth through expanded brand awareness and prominence among both athletes and fans.

Still early on in the growth story
At just $2.5 billion in revenue for the past year, Under Armour is still a much smaller company than rival Nike. Under Armour's current size and growth rate are comparable with Nike circa-1990:

UA Revenue (Annual) Chart

UA Revenue (Annual) data by YCharts

The 24-year period since Nike had revenue comparable to Under Armour's revenue over the past year has been highly rewarding to shareholders, with a market-crushing return of over 4,000%:

NKE Chart

NKE data by YCharts

While Nike's growth has slowed as the company has matured, the chart above illustrates just how fantastic an investment in the company has been for investors.

The investment thesis in Under Armour
Under Armour may appear expensive based on most traditional valuation metrics, and its premium valuation will almost certainly lead to volatility. While there may (or may not) be a better time to accumulate shares of Under Armour in the future, the blueprint of Nike's rise over the past 20 years illustrates that with its premium valuation Under Armour could still deliver multi-bagger returns for investors who believe in the company's long-term growth opportunity. With average revenue growth of 30% per year since its IPO, Under Armour is actually ahead of the growth trajectory of Nike in the early 1990s; assuming this growth slows to 20% per year, Under Armour is still on track to reach $25 billion per year in revenue in just 12 years.

I think Under Armour can achieve that target. The company is constantly expanding, as illustrated by its recent entry into Brazil and its early progress toward becoming a major player in the athletic footwear market. With superior products thanks to a focus on innovation and the customer, Under Armour has plenty of momentum.

To illustrate the opportunity for investors, consider this: if Under Armour reaches $25 billion in revenue in 2026 and trades at the same price-to-sales ratio of 2.4 that Nike commands today, the company's market capitalization will be approximately $63 billion (comparable to Nike's current market capitalization). Compared to Under Armour's current market capitalization of $12 billion, the value of the shares will have increased over 400% in that time (15% annualized). Annualized returns of 15% are both a realistic target as well as a simple illustration that Under Armour's current valuation still supports plenty of opportunity for market-beating returns in the future.

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Brian Shaw owns shares of Amazon.com and Under Armour. The Motley Fool recommends Amazon.com, Nike, and Under Armour. The Motley Fool owns shares of Amazon.com, 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.

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