The market has been fraught with uncertainty in recent times due to rising interest rates, faster inflation, and the war involving Russia and Ukraine. Consequently, many stocks -- particularly technology ones -- have been shattered over the past six months, with no signs of turning the corner anytime soon. The ambiguity surrounding the market has triggered investors to exit positions in speculative stocks and transition to safer assets.
Negative sentiment around the technology sector has convinced many people to check out more traditional companies in well-established markets. Two of those companies, Nike (NKE -0.38%) and Lululemon (LULU 0.73%) reign over the sports apparel market.
Despite being in different phases of growth, both stocks could be worthy investment opportunities today. On that matter, let's examine both companies to help you decide which one -- if either -- better suits your long-term investment portfolio.
Image source: Getty Images.
Nike
Perhaps the most recognized retail brand in the world, Nike's economic moat is unmatched. The company's share price, which is down 24% year to date, has been under pressure lately due to pandemic-related factory shutdowns and concerns about sales in China. Even so, Nike continues to deliver, further affirming the company's number one trait: consistency.
In its fiscal 2022 third quarter (which ended Feb. 28), Nike reported top and bottom lines of $10.9 billion and $0.87 earning per share (EPS), beating Wall Street's expectations by 3% and 21%, respectively. The strong results were announced even after quarterly sales in China fell 8%. Investors should be quite pleased with Nike's third-quarter outing, considering sales in the Greater China region made up nearly 20% of revenue in 2021. The company's ability to navigate challenges and deliver strong numbers time and time again should not be taken lightly by investors.
It's important to note that Nike's growth is slowing, however. Analysts are modeling sales and earnings of $46.9 billion and $3.74 EPS to end 2022, translating to only 5% growth year over year for both metrics. Looking out further, Nike is expected to generate top and bottom lines of $62.7 billion and $6.20 EPS by 2025, representing average annual growth rates of 7% and 12%, respectively. It's quite clear -- Nike is as reliable as they come, but future growth will be moderate.
Lululemon
Lululemon's growth trajectory is a bit of a different story. The company increased sales and net income by 42% and 66% this past year, climbing to $6.3 billion and $7.79 EPS, respectively. Moving forward, Lululemon is expected to sustain robust growth. Analysts are forecasting $7.4 billion in sales and EPS of $9.25 this year, indicating 19% growth year over year for both metrics.
Given that Lululemon controls only 6% of the sports apparel market today, the company is equipped with a long runway for growth in the years ahead. Nike has been the longtime bully in the industry, whereas Lululemon is the new kid on the block, still yearning to make some noise.
Although its moat doesn't compare to Nike's, in my view, Lululemon's high-quality/high-prices business model distinguishes the company from the rest of the industry. It will be interesting to watch Lululemon's business play out, but I think it's safe to say this company will be around for a long time.
A valuation comparison
From a valuation perspective, Nike is the cheaper stock. Lululemon is trading at 49 times earnings, much richer than Nike's price-to-earnings multiple of 34. But given that Lululemon is expected to grow earnings by nearly fourfold that of Nike's, it's not unreasonable to argue that Lululemon deserves a higher multiple.
NKE PE Ratio data by YCharts.
Both companies, but especially Nike, are trading below historical averages. Nike's 34 price-to-earnings multiple today more than 20% lower than its five-year average of 43. Likewise, Lululemon's price-to-earnings ratio of 48 comes in slightly below its five-year average of 54. So, no matter how you want to chalk it up, both companies are trading at discounts to historical levels today.
So, Nike or Lululemon?
I think both companies possess favorable qualities -- it all boils down to what you're in search of. If you want a cheaper stock that offers peak stability, go with Nike. But if you're more interested in growth opportunities and willing to pay a higher price, Lululemon is the better option. Either way, I think both companies could boost any long-term portfolio. In a market swarming with uncertainty, both Lululemon and Nike provide investors with solid investment opportunities today.
