Nike (NKE 1.66%) stock is on fire at the moment, surging 57% off its 52-week low of $82.22 in September. The swoosh is seeing accelerating growth in footwear sales, and investors expect more growth ahead as the company further builds on its advantage with its digital connections to customers.
However, investors face a dilemma. Are Nike's brand and growth worth an expensive valuation? Let's dig into what's driving Nike's momentum to determine if the stock is still a buy.
NYSE: NKE
Key Data Points
Nike is picking up the pace on sales
In Nike's fiscal second quarter ending in November, total revenue grew 17% year over year on a reported basis, but excluding currency changes from overseas sales, revenue exploded 27% -- much faster than the previous quarter's increase of 10%.
Despite that faster pace of growth, Nike is still not quite keeping up with Lululemon Athletica, especially in apparel, which is Lululemon's main business. But two-thirds of Nike's revenue is footwear, and it's running circles around its primary footwear competitor Adidas.
Nike has catalysts for more growth
The three stripes reported currency-adjusted sales growth of just 4% in the most recent quarter. Adidas recently ended its partnership with Ye, formerly known as Kanye West, over antisemitic remarks the music artist made. West's Yeezy sneakers were a top seller for Adidas, but that void is an opportunity for Nike to gain market share.
Nike saw a strong response to the new LeBron 20 sneaker that it recently launched. Management told analysts on the recent earnings call to expect more releases in the near term, including "exciting signature debuts" in basketball and from the Jordan Brand.
Moreover, Nike could get another boost once China's economy starts to recover. This was Nike's fastest-growing market before the pandemic, and China's weakened economy was a major drag on Nike's growth over the last year. Greater China revenue fell 13% year over year in fiscal 2022 excluding currency exchange effects, but this important market for Nike might be turning around after China revenue increased by 6% in the last quarter.
Is the stock a buy?
Before Nike surprised investors with its latest earnings report, analysts were lowering their forecasts over economic uncertainty and bloated inventory levels, which are hurting many retailers right now. That has changed. Analysts are revising their estimates higher, with full-year revenue now expected to increase by 7%, but that still seems a bit conservative considering the company's momentum.
In fact, the current revenue growth estimate is still below management's long-term target of high single-digit to low-double-digit revenue growth through fiscal 2025. As analysts lift their growth estimates, that could support the stock's advance in the near term, but it's getting difficult to justify Nike's valuation as the stock climbs higher.
Nike's price-to-earnings (P/E) ratio currently sits at 41 based on this year's earnings estimates, which is much higher than Lululemon's P/E of 32. A 40-plus P/E is expensive for a company that is expected to grow earnings at a mid-teens rate over the next several years. One way to neutralize the stock's expensive price tag is to start a small position and dollar-cost average into it over time, which is how I approach high-P/E stocks I want to hold for the long term.
Nike has tremendous brand power, a strong e-commerce business, and a membership program that allows the brand to stay connected with millions of loyal customers. These qualities should keep the business' value growing for many years.
