One nifty feature available in the Robinhood free stock trading app is a top 100 list that reveals the most popular stocks owned by Robinhood users. The list represents a mixture of all kinds of stocks spanning several industries. There are a handful of top consumer goods stocks on the list, including Nike (NKE +0.41%).
A total of 102,882 Robinhood traders owned shares of Nike at the time of this writing. Obviously, Nike is a household name, and many investors like to buy shares of companies they know well, which follows the tried-and-true wisdom of investing legend Peter Lynch.
But what makes Nike a good stock to own now?
Image source: Nike.
A history of outperformance
Nike is not only an iconic brand recognized throughout the world, but from a purely financial point of view, it's a very well-run business that is operating in a growing industry. Between fiscal 2009 and fiscal 2019 (which ended in May), its annual revenue more than doubled to $39 billion. But that's relatively small next to the more than $300 billion that is spent on athletic apparel every year.
Most importantly, Nike's profits grew even faster, with net income climbing from $1.5 billion in fiscal 2009 to just over $4 billion in fiscal 2019. Even though COVID-19 caused Nike's sales to collapse in the recent quarter, the stock has had a 535% return over the last 10 years with dividends reinvested. That's roughly double the return of the broader market as measured by the S&P 500 index.
NKE Total Return Price data by YCharts
Companies that have consistently grown revenue and profits over time and delivered market-beating performance will usually keep performing well in the future. Great growth stocks will continue to hit new highs over the long term. Nike has a very strong consumer brand that should all but guarantee its future success. That's likely a reason why many investors have added shares of Nike to their Robinhood accounts.
Will COVID-19 put a stop to Nike's momentum?
Some investors might be surprised by how quickly the broader stock market bounced back, especially given the uncertainty that still remains in the near term for the broader economy and the recent spike in unemployment. Nike's store closures caused its sales to tumble by 38% year over year in the fiscal fourth quarter ending in May.
However, investors are anticipating a strong recovery on the horizon. Nike expects the next two quarters to show a decline in revenue compared to last year, but during the fiscal fourth-quarter conference call on June 25, CFO Matt Friend said that revenue is expected "to be up significantly" in the second half of fiscal 2021. A strong second half of the fiscal year is expected to bring full-year revenue up to flat versus fiscal 2020, which is remarkable given the steep drop in sales in the recent quarter.
In Nike's latest quarterly earnings report, there were signs of a strong underlying business. Nike's business in greater China, which has been its fastest-growing region, has already returned to revenue growth on a currency-neutral basis.
More impressive was Nike's phenomenal e-commerce growth in the recent quarter, which accelerated to a growth rate of 79% and made up nearly a third of total revenue. Management sees digital sales reaching half of annual revenue over time, which should fuel Nike's profit growth even more since digital sales generate a higher profit margin than sales through physical stores.
Image source: Nike.
Nike's future is worth a premium
The stock is not a value in the traditional sense. It sports a price-to-earnings (P/E) ratio of 40.6, based on the consensus earnings estimate for this year. That's high when the average stock in the S&P 500 has a forward P/E of 31.5.
The higher valuation reflects the expectation that Nike will continue to outperform in the future. The demand for athleisure and lifestyle sneakers doesn't seem to be going away. Last year, the Nike Air Max 270 and the Air Force 1 Low were the top two best-selling sneakers in the market. Footwear makes up two-thirds of Nike's annual revenue.
CEO John Donahoe also believes Nike will emerge as a stronger business on the other side of COVID-19, based on the performance of the investments it is making to support the growth of the digital business. Nike's apps, such as SNKRS and Nike Training Club, are important pillars of Nike's e-commerce strategy, which management refers to as its Consumer Direct Offense strategy.
"As we shift our operating model to fuel this strategy, NIKE's leadership position will become even stronger in the future as sport continues to resonate with consumers, amid a global shift toward health and wellness," Donahoe explained on the recent earnings call.
Given the trends toward more active lifestyles, coupled with an iconic brand that has demonstrated a long track record of profitable growth, Nike is a top choice in the consumer discretionary sector and with Robinhood traders.
