3 Reasons to Buy Nike and 1 to Sell

Nike's (NKE 0.31%) stock price tumbled 7% on June 28 after the footwear and athletic apparel maker posted its fourth-quarter earnings report. Its revenue dipped 1% year over year (but grew 3% in currency-neutral terms) to $12.2 billion, which beat analysts' expectations by $140 million. Its earnings fell 3% to $0.90 per share but still cleared analysts' estimates by nine cents.

Nike's headline numbers looked stable, but is the stock still a dependable blue-chip stalwart after losing nearly 40% of its value this year? Let's evaluate three reasons to buy Nike -- and one reason to sell it -- to decide.

Image source: Getty Images.

1. Nike Direct continues to expand

Five years ago, Nike launched its "Consumer Direct Offense" to aggressively expand its direct-to-consumer (DTC) channel by opening more brick-and-mortar stores and expanding its e-commerce platforms.

That strategy reduced Nike's dependence on middlemen retailers, enabled it to quickly showcase its latest products, strengthened its direct engagement with customers, and widened its moat against competitors like Adidas (ADDYY 2.73%) and Under Armour (UA 0.48%) (UAA 0.61%).

Those DTC businesses, which are now collectively referred to as "Nike Direct," consistently grew at a faster clip than Nike's other businesses over the past several years and accounted for 40% of its top line in fiscal 2022.

Data source: Nike. Currency-neutral basis. YOY = Year-over-year.

During the Q4 conference call, CFO Matthew Friend predicted that "Nike Direct will lead our growth and Nike Digital will be our fastest-growing channel" in fiscal 2023. Friend also reiterated the company's long-term goal of generating "approximately 60%" of its revenue from Nike Direct.

This transformation insulated Nike from store closures during the onset of the pandemic in fiscal 2020 (which ended in May of that calendar year) and could shield it from other headwinds for the broader retail sector in the future.

2. Expanding gross margins and stable earnings growth

Nike's gross margins dipped in fiscal 2020 as the pandemic spread, but they consistently expanded over the following two years.

It mainly attributes that expansion to a higher mix of full-price products being sold through Nike Direct instead of lower-margin wholesale channels. Those expanding margins, along with its consistent buybacks, enabled Nike to recover quickly from the pandemic and consistently grow its earnings per share.

Data source: Nike. YOY = Year-over-year.

Nike expects its gross margins to dip slightly in fiscal 2023 as it grapples with higher freight costs, a recalibration of its inventories following the COVID-19 disruptions in China, and currency headwinds.

But during the conference call, Friend reiterated Nike's goal of boosting its gross margins into the "high 40s" over the long term. However, investors should note that Adidas and Under Armour both expanded their gross margins above 50% in fiscal 2021 (which aligns with the calendar year).

3. Its valuation and dividend

For fiscal 2023, Nike expects its revenue to rise by the low double digits on a currency-neutral basis. Analysts expect its reported revenue and earnings to grow 9% and 19%, respectively, for the full year.

Nike's stock also looks reasonably valued at 24 times forward earnings and pays a decent forward dividend yield of 1.2%. Therefore, investors who thought Nike was too hot to handle when it skyrocketed to its all-time high of $177.51 last November should take a fresh look at the stock.

But Nike also isn't that cheap relative to its industry peers: Adidas and Under Armour trade at 19 and 14 times forward earnings, respectively. 

One reason to sell Nike: Its dependence on China

The biggest problem for Nike is its dependence on China, which accounted for 16% of its top line in fiscal 2022. This market was once a core growth engine for the company, but it sputtered out as China's economic growth cooled off and COVID-19 disruptions exacerbated that slowdown.

Data source: Nike. Currency-neutral basis. YOY = Year-over-year.

Friend said Nike remains confident in its "ability to fuel long-term growth" in China, but he also admitted it was taking a "cautious approach" to the region while it grappled with unpredictable COVID-19 and supply chain challenges.

It's still too early to buy Nike

Nike is still a good long-term investment, but I don't think it's cheap enough relative to Adidas and Under Armour yet. It's also operating at lower gross margins than both competitors and could face significant challenges in China later this year. Simply put, I think it would be prudent to stick with more well-rounded blue-chip stocks until Nike clears those near-term hurdles.