Under Armour (UA 1.19%) (UAA 2.04%) has often been called the "next Nike (NKE -1.00%)." For the better part of a decade, that moniker rang true -- it posted double-digit sales growth every year since its IPO in 2005 and quickly became a Wall Street darling.
But over the past three years, shares of Under Armour have lost more than half their value, while shares of Nike rallied nearly 50% -- making the "next Nike" a much worse investment than the "original" one. Will that trend continue this year? Let's take a look at both companies' businesses, their growth trajectories, and valuations to find out.
How are Nike and Under Armour different?
Sixty-three percent of Nike's revenue came from footwear last quarter, 27% came from apparel, and the rest came from athletic equipment. The company is well diversified across the world, with only 45% of its top line coming from the North American market during the quarter.
Under Armour generated 71% of its sales from apparel last quarter. Seventeen percent came from footwear, 8% came from accessories, and the rest came from licensing revenues and connected devices. UA is also much more dependent on the North American market, which accounted for 82% of its sales during the quarter. This exposes UA more heavily than Nike to the Trump administration's proposed "border tax" -- since most of UA's products are manufactured overseas.
How fast are Nike and Under Armour growing?
Nike's revenue rose 6% to $32.4 billion in 2016, and is expected to grow another 6% this year. That growth sounds steady, but it's disappointing to investors who expected Nike to fulfill its promise of generating $50 billion in annual revenue by 2020.
Nike previously declared that rising e-commerce sales and international growth would help it hit that target. However, it now needs to post double-digit sales growth every year to reach that goal -- which seems unlikely with the newfound growth of rivals like Adidas and Puma.
Under Armour's revenue rose 22% to $4.8 billion last year, but analysts expect that growth to slow to 11% this year. Like Nike, UA made a bold promise -- $7.5 billion in annual revenue in fiscal 2018 -- which now seems unlikely at its current growth rate. UA also claimed that its overseas expansion and growth in new product categories (like wearables and apps) would help it hit that target. Unfortunately, the same headwinds that threaten Nike could throttle its long-term growth.
How profitable are Nike and Under Armour?
Nike's larger scale gives it a major advantage over Under Armour in terms of margins. Not only can it produce products at lower costs than UA, but its sales and administrative expenses use up a smaller percentage of its overall revenue.
Nike's earnings rose 17% last year, and analysts expect another 12% growth this year. UA's earnings fell 15% last year, and analysts anticipate a 7% drop this year. That decline is due to UA's increasing dependence on lower-margin footwear and the rising cost of hiring celebrity spokespeople like Steph Curry and Dwayne "The Rock" Johnson.
Nike pays a forward dividend yield of 1.3%. That yield is much lower than the S&P 500's average yield of 2%, but Nike has hiked that dividend annually for eight straight years, and its payout ratio of 29% leaves plenty of room for future dividend hikes. Neither class of UA shares pay regular dividends.
The valuations and verdict
Under Armour's Class A shares trade at 44 times earnings, which is much higher than the industry average of 27 for apparel retailers. Nike trades at just 25 times earnings.
Picking a winner between these two athletic apparel giants is simple. Nike has better top- and bottom-line growth, superior scale and marketing firepower, and a more globally diversified business than Under Armour. Since Nike also pays a dividend and trades at a lower multiple than UA, it's clear that the "original" Nike is much a better investment than the "next" Nike at current prices.