Investors have been high on Nike (NKE 0.45%) following its strong fiscal fourth-quarter earnings report in June. Heading into September, shares were up over 20% year to date, but the stock price has pulled back to where it is now up by roughly 7%.

Despite supply challenges, the business is humming right now. Revenue finished fiscal 2021 (which ended in May) up 23% over the previous year. But the market might be asking investors to pay too much relative to alternatives.

Nike store exterior

Nike store in Seoul, South Korea. Image source: Nike.

Nike's digital business is surging 

Management expects the company to grow faster post-pandemic than before. It previously called for revenue to grow at a high single-digit rate through fiscal 2023, but it now sees it growing as high as the low double-digit range through fiscal 2025. The same goes for earnings, where Nike now expects earnings per share to grow at a mid-to-high-teens annualized rate, slightly faster than the mid-teens rate it expected before the pandemic.

A key part of Nike's future growth will come from memberships on the digital side, which helps drive repeat purchases. Nike's apps, including the popular SNKRS app, send customers alerts when new releases drop. When someone signs up for a free membership, it almost makes Nike a default option whenever the customer is in the market for new athletic wear. 

Growth in digital memberships is helping in other ways besides driving repeat purchases. For example, Nike learns more about customer preferences, which can inform new product design. A growing membership base also provides data that helps align inventory with demand. This helps Nike's bottom-line profits since it results in fewer materials wasted and higher full-price sales.

Nike members have increased from 170 million in fiscal 2019 to 300 million in fiscal 2021. The higher-margin digital business now accounts for more than 20% of total revenue, but management expects digital to reach 40% by fiscal 2025. 

Weighing growth and value

"The structural tailwinds we discussed before, including the return to sport and permanent shifts in consumer behavior toward digital and health and wellness, continue to create energy for us," CEO John Donahoe said during the fiscal fourth-quarter earnings call in late June. 

Investors should watch for continued momentum in Nike's digital business, as well as any supply chain challenges impacting sales, when it reports fiscal first-quarter earnings on Thursday, Sept. 23, after the market closes. 

For the full year, analysts currently anticipate revenue growing 12.5% in fiscal 2022 and 10% in fiscal 2023, consistent with management's long-term growth objective. EPS is expected to improve 21% this year and 17% in fiscal 2023.

While Nike's growth trajectory looks solid, it's always a good idea to shop around to see if the stock you're considering is worth its price tag. It currently trades at a price-to-earnings ratio of 43. While that discount is justified compared to the faster-growing Lululemon Athletica (LULU -0.98%), which trades at 67 times earnings, Nike's P/E is still high by historical standards. About five years ago, the stock was hovering around a 25 P/E, but the valuation has stretched to levels that seem too high for a business expected to grow earnings by the mid to high teens.

Despite the restrained share price gains, investors can find better deals than Nike right now. For example, Under Armour (UA -0.15%) (UAA 1.04%) has been showing encouraging improvement in its turnaround efforts lately and trades at a lower P/E of 23. That is compelling for a business that analysts expect to grow earnings at an annualized rate of 22% over the next five years. 

Nike is a great business, but investors shouldn't pay just any price to own the stock, especially when there are other athletic apparel stocks trading at lower valuations that offer just as much growth.