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Better Buy: Nike vs. Starbucks

By Neil Patel - Jan 16, 2021 at 7:00AM

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Which of these consumer favorites should you add to your portfolio?

One way for many investors to improve their returns while lowering their risk is to focus on companies that have a long track record of delivering great products to consumers. Nike (NKE 4.38%) and Starbucks (SBUX 2.77%), with their powerful brands, belong in a rare group that have been consumer darlings for a long time.

Owning shares in both companies over the past decade would have been a winning move. At recent prices, Nike shares are up 566% since early 2011, while Starbucks shares aren't far behind at 524%.

NKE Chart

NKE data by YCharts

But investors can't rely on the past as a decent guide for the future. Let's see which one of these businesses is deserving of a place in your portfolio for the next decade.

The leader in sports apparel

Nike's business took a major hit from the coronavirus pandemic in the fourth quarter of its fiscal 2020 (which ended May 31), as revenue fell 38% and the company posted a loss of $790 million due to worldwide store closures. But Nike has recovered nicely, thanks to its digital infrastructure and impressive gains in China. In the second quarter of its fiscal 2021 (which ended Nov. 30), e-commerce sales jumped 84%, while the Greater China segment recorded 24% revenue growth.

This resulted in overall quarterly revenue and diluted earnings per share (EPS) rising 9% and 11%, respectively, over the prior-year period. Nike's resiliency is on full display, and management's investments in technology are paying off. "Innovation has always been our life blood at NIKE," CEO John Donahoe said on the most recent earnings call. 

Nike's desire to utilize technology to connect more with consumers is working. Its different digital applications are resonating extremely well. For example, the SNKRS app, which gives shoe fanatics access to new product releases and upcoming events, hit $1 billion in revenue in fiscal 2020. Donahoe believes SNKRS "remains one of Nike's greatest competitive advantages." 

Technology is clearly becoming an increasingly important tool to drive higher brand recognition and engagement, and Nike is riding this trend. The business has returned to growth following the pandemic's disruption, and its impressive performance in e-commerce and in China indicate the company's long run isn't over. 

The king of caffeinated beverages

Starbucks also suffered a setback due to the coronavirus, but its business has not fully returned to pre-pandemic levels. Sales in the fourth quarter of its fiscal 2020 (which ended Sept. 27) were 8.1% lower than the prior-year period. Despite this, management still strongly believes in the company's long-term growth story.

Starbucks held its biennial investor day in December, where CFO Patrick Grismer announced that he thinks Starbucks "will reach approximately 55,000 stores across 100 markets by the year 2030." Although those of us in the U.S. view Starbucks' stores as ubiquitous, this may not really be the case globally. Investors welcomed the news -- the stock popped 5% after the virtual event. 

With nearly 33,000 locations today, this is quite an ambitious target, and it would make Starbucks the largest food and beverage chain in the world. Similar to Nike, Starbucks will rely on China for much of this growth. Fueled by openings of the Starbucks Now concept, which are smaller-format retail outlets located in high-traffic areas, the company is forecasted to have 6,000 stores (up from the current 4,700) in the country by the end of fiscal 2022.

Starbucks is also known for its outstanding rewards program. The company ended the most recent quarter with 19.3 million 90-day active members in the U.S., a 10% increase compared to the prior-year period. What's more remarkable is that these customers accounted for close to 50% of revenue. It's apparent that Starbucks, like Nike, has benefited greatly from using technology in its business model.

Clock with hands saying Time to Buy

Image source: Getty Images.

The final verdict

Nike and Starbucks were forced to shutter locations worldwide because of the coronavirus pandemic and have since recovered at different rates. Nike's business is back in growth mode, while Starbucks improves with each passing quarter.

I think long-term investors would gain by adding both companies to their portfolios. These are two global businesses with exceptional brands that sell products consumers absolutely love. Furthermore, it's evident that their growth will be bolstered by the smart use of technology to acquire and engage customers, as well as continued progress in China.

But if I had to choose, I'd give the slight edge to Starbucks simply due to valuation. The stock is trading at a forward price-to-earnings (P/E) ratio of 36 compared to Nike's 41, giving me just a little more comfort with the price being paid.

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Stocks Mentioned

NIKE, Inc. Stock Quote
NIKE, Inc.
$112.94 (4.38%) $4.74
Starbucks Corporation Stock Quote
Starbucks Corporation
$74.49 (2.77%) $2.01

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