Shares of Nike (NKE -2.28%) are currently sitting about 32% below the all-time high they set in 2021. But the stock rallied in recent months after falling by more than 50% from its peak last year. Investors have been impressed with Nike's revenue growth in a tough operating environment.

Nike just reported another quarter of better-than-expected revenue. However, that result wasn't enough to propel the stock higher. It's down by 5% since the earnings report.

Does this latest dip present a good buying opportunity? While Nike's business is experiencing momentum right now, the stock has gotten expensive on a price-to-earnings basis. Investors are placing a big premium on Nike's future growth even as the company is seeing margins weaken due to high inventory levels.

Nike's growth is not as strong as it looks

In its fiscal 2023 third quarter, which ended Feb. 28, Nike posted year-over-year revenue growth of 19% (excluding foreign currency exchange impacts) -- its third consecutive quarter of double-digit top-line growth. That's an impressive performance given the high inflation that has pressured consumer spending over the last year. Athletic apparel was one of the strongest-performing areas of retail for many years and remains so in the current environment.

Nike credited its gains to the digital side of the business, most notably strong increases in traffic on mobile apps. Most impressive was the growth in its wholesale channel, which also remains a key growth driver. Nike's wholesale revenue (for goods sold to consumers by its retail partners) grew by 18% year over year, indicating that consumers are seeking the brand wherever they can find it.

But there is one weakness in Nike's armor: high inventory. Its cost of sales grew by 21% year over year -- faster than its revenue growth -- which brought its gross margin down a few percentage points to 43.3%. While management noted that full-price merchandise sales were strong, its lower gross margin shows that part of the company's top-line growth was driven by discounting.

NKE Cost of Goods Sold (Quarterly) Chart

Data by YCharts. EPS = Earnings per share.

Management is moving excess inventory with promotional sales, which is partly to blame for the 10% decrease in earnings per share through the first three quarters of this fiscal year, which will end in May. 

A high valuation held the stock in check

If Nike was reporting better earnings, the stock might have moved higher. But its weak earnings growth makes its forward price-to-earnings (P/E) ratio of 37 look expensive relative to industry peer Lululemon Athletica, which trades at a forward P/E of 30. And while Nike struggles to deliver earnings growth, Lululemon reported 30% year-over-year growth in adjusted earnings per share in its most recent quarter. 

NKE PE Ratio (Forward) Chart

Data by YCharts.

Obviously, Nike's inventory problem is a short-term issue that should have no impact on its long-term growth potential. But the only way to justify paying a higher premium for Nike is if the company can sustain a higher rate of growth in a post-pandemic environment.

Indeed, Nike's investments in digital sales appear to be positioning the company for faster growth. The company's recent double-digit percentage revenue growth is outpacing its 10-year average of 7%. 

On the day after the fiscal Q3 report, UBS analyst Jay Sole raised his price target on Nike and maintained his "buy" rating on the stock despite its currently rich valuation. Sole's reasoning was based on Nike's superior digital sales growth in an environment where other retailers are not performing as well. Nike's digital sales growth of 24% last quarter was stronger than the 19% sales growth at its company-operated stores.

But when comparing Nike to Lululemon on digital growth, the latter still wins. Lululemon's direct-to-consumer revenue made up 52% of its business last quarter and grew 37% year over year. Lululemon stock offers more growth for a lower price.

Buying lower-P/E stocks where the market is not fully appreciating a company's underlying growth is how you find great investments. On that note, investors should shop around before settling for Nike.