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Could This Create a Network Effect for Nike?

By Jon Quast - Jun 23, 2021 at 11:30AM

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Runners can connect with friends via Nike's new apps.

A company benefits from a network effect when its business gets stronger with more users. This can play out in different ways in different industries. But for consumer-facing brands, they can get stronger when there's a social element tied into their products.

In this snippet from Motley Fool Live, recorded on June 15, The Motley Fool's Bureau Chief of Healthcare and Cannabis, Corinne Cardina, points out that apparel company Nike (NKE -0.86%) could be gaining a network effect from the investments it's making in its technology.

Corinne Cardina: We're going to talk about Nike for a minute. This is a $205 billion market cap. I'm going to do a little bit of compare and contrast with Adidas (ADDYY -1.91%) because they both started out as footwear giants, have expanded -- one better than the other. Nike is certainly more diversified than Adidas, but Adidas is a lot smaller -- it's $68 billion in market cap. Both of them are really going after the direct-to-consumer market.

Let's talk about its stock. Nike stock is up almost 30% since Jan. 1, 2020. I like to look at that because that incorporates the whole pandemic plus the start of the recovery here in the U.S. Now, that 30% since Jan. 1, 2020, it just underperformed the S&P [500] by about 1 percentage point. You couldn't have done better by investing in Nike than you would have a broader market ETF.

Now, Nike does have a smallish dividend. It's yielding about 0.8%. So again, I'm not saying you'd be rich if you bought Nike at the start of the pandemic. But I do think that you would have been a lot worse off without the strides that Nike has made in the digital transformation. And they were setting this up before the pandemic, so very much right place, right time related to e-commerce and some of the tech offerings. Then the strength of Nike's brand really can't be understated. It's consistently got more brand loyalty and awareness than Adidas in the classic rankings, the brand rankings.

Nike had to close stores like plenty of other retailers during the pandemic for about a quarter. But management has come out and said, we stress tested our direct-to-consumer model, which includes e-commerce and all the digital stuff. So they're really optimistic about that.

Let's take a step more recently and just look at the stock year-to-date. It's down 7%. Meanwhile, the S&P [500] is up 13%. If we take a smaller look, it has not done so well. Its third quarter sales were up overall just 3%. Now, management cited industry logistical issues that were not specific to Nike, and they are predicting a nice recovery. They talked about port issues, they talked about supply chain, all those things.

What we're looking at is Nike has basically invested a ton of money in its tech and digital transformation. They have all these apps. I use the Nike Run Club app. It's totally free. They do push alerts. They're always trying to sell me shoes on there, but I like it because it tracks my stats for my little runs. I'm kind of like a new runner. But they also have Nike Training Club for more advanced runners. They have an app called SNKRS -- I guess it would be pronounced "sneakers." They're bringing people into their ecosystem with these huge value adds. The more people who join it, you have a networking effect. If Jena [Greene, Motley Fool Bureau Chief of Consumer Goods] is on Nike Run Club, and I'm on Nike Run Club, we can share our stats, we can be accountability buddies.

I think we're going to start seeing more and more return on investments on the technological investments that Nike has made. E-commerce is making up one-third of their business. They saw more than a 60% increase in monthly engaged users on its apps in Q3. U.S. sales are their biggest, then China second. There are some concerns about its traction in China. There have been some boycotts of Nike, kind of getting into geopolitical issues there.

But Nike has some exciting near-term catalysts that could see its stock tick up from that recent underperformance, the biggest being the Olympics. Adidas will probably enjoy some of that too, but overall, the return of spectator sports bodes well for Nike. 

Corinne Cardina has no position in any of the stocks mentioned. Jon Quast has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike. The Motley Fool has a disclosure policy.

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Stocks Mentioned

NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$117.04 (-0.86%) $-1.02
adidas AG Stock Quote
adidas AG
ADDYY
$86.35 (-1.91%) $-1.68

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