Despite Nike's (NKE -0.50%) stock price surging 30% over the last 12 months, 2020 was a mixed bag for the swoosh. Store closures weighed on sales, but investors have high expectations for Nike's digital business, which has tremendous momentum right now.
While the stock trades at a steep price tag of 44 times forward earnings estimates, there are three catalysts on the horizon that could justify the lofty share price.
1. E-commerce growth
In recent earnings reports, management has emphasized that the consumer shift to digital is here to stay. That appears to be the case after a strong fiscal 2021 second-quarter earnings report in December.
Nike's digital sales growth over the last three quarters has been off the charts, up 79% (Q4 2020), 83% (Q1 2021), and 80% (Q2 2021) year over year on a currency-neutral basis. Most impressive is that this level of growth remained consistent even as physical stores reopened.
More than 90% of Nike's stores were open in the fiscal second quarter (which ended in November), yet digital sales were still growing slightly faster than the fiscal fourth quarter of 2020 when most stores were closed at the start of the pandemic.
Looking ahead, Nike has a great opportunity to drive higher repeat sales from existing customers. The company added 70 million new members during the pandemic and drove 7 billion brand impressions on social media platforms in the most recent quarter.
2. Return of live sports
Nike has historically relied on sporting events to market its brand to consumers. There is no better marketing for the company than sports fans watching their favorite athletes wear Nike gear, so a return of live sporting events should be a plus in the short term.
To get its stores back to normal sales levels, Nike plans to ramp up marketing investments, or what it calls demand creation, in the near term.
Management's guidance for fiscal 2021 calls for revenue growth to be in the low teens. Profits should rise even faster, given the outlook for improved gross margin and only a single-digit increase in operating expense growth.
For what it's worth, Wall Street analysts expect Nike to beat its own guidance. Analysts forecast revenue growth to be 15% in fiscal 2021, with earnings per share recovering to $3.02.
3. Investments in data science
Nike's investments in technology before the pandemic came at the perfect time. Over the last three years, Nike has made three acquisitions that expanded the company's digital sales capabilities.
In 2018, Nike acquired two technology businesses, Zodiac and Israel-based Invertex. These firms strengthened the company's capabilities in data analytics and artificial intelligence, while the acquisition of Celect in 2019 added expertise in retail predictive analytics and demand sensing.
Management credited Celect's demand-sensing technology for helping drive 100% year-over-year digital revenue growth in North America during peak holiday demand in the last quarter.
The digital segment, including sales from retail partners' digital channels, already exceeds 30% of Nike's entire business. Obviously, there is a lot of room for it to grow. What's more, the higher margins from digital sales should provide a tailwind to Nike's earnings growth.
It's difficult to predict where the stock goes in the short term, but Nike remains one of the best consumer discretionary stocks to buy. It's ahead of the game in e-commerce, which positions the company well to deliver market-beating gains for investors.