Nike Stock: Buy, Sell, or Hold?

Investors might have warmed up to stocks again this year, but one blue chip stock which was left out in the cold was Nike (NKE -2.62%). The athletic footwear and apparel maker's stock price declined about 7% year to date as the S&P 500 advanced nearly 20%. Let's see why Nike underperformed the market -- and if investors should buy, sell, or hold its stock.

What happened to Nike over the past three years?

Nike's revenue declined 4% in fiscal 2020 (which ended in May 2020) as the pandemic spread and shut down brick-and-mortar stores. But in fiscal 2021, its revenue rose 19% as those headwinds dissipated and it continued to expand Nike Direct (its e-commerce channel and first-party stores) to reduce its dependence on wholesale retailers.

Image source: Nike.

The bulls expected that momentum to continue, and Nike's stock eventually surged to its record high of $174.26 during the apex of the growth stock rally on Nov. 5, 2021. But in fiscal 2022, Nike's revenue only rose 5% as it grappled with the intermittent COVID-19 lockdowns in China, supply chain constraints, and inflationary headwinds.

Rising interest rates also compressed the market's valuations, and Nike's stock sank to a two-year low of $82.22 on Oct. 3, 2022. But after that steep sell-off, Nike gradually recovered in fiscal 2023 as its robust growth in North America, Europe, and other markets offset its weaker sales in China. China also finally ended its "zero-COVID" policies in early 2023. 

Data source: Nike. Constant currency basis. YOY = Year over year.

But that stabilization didn't lead to a meaningful acceleration, and Nike's revenue growth decelerated again over the past two quarters. That slowdown was caused by the softness of its wholesale business and its strategic reductions to its spring and summer inventory commitments, which were needed to cope with slower consumer spending and higher supply chain costs.

Nike's revenue rose 10% (16% in constant currency terms) in fiscal 2023, but analysts expect just 5% growth in fiscal 2024. Yet Nike is still growing faster than most of its competitors. Analysts expect Under Armour's revenue to grow less than 1% this year. Adidas faces a 5% revenue decline as it struggles with its discontinuation of Kanye West's Yeezy brand, sluggish demand in China, and other macro and competitive headwinds.

But its margins are being squeezed

Nike's revenue continues to rise, but its margins fell as it relies heavily on markdowns to sell more products. Outsized inflation exacerbates that pressure by curbing consumer spending and boosting its logistics expenses. As a result, Nike's gross margin dropped from 46% in fiscal 2022 to 43.5% in fiscal 2023. That pressure reduced Nike's earnings per share (EPS) by 14% in fiscal 2023, but analysts expect 16% earnings growth in fiscal 2024 as inflation eases and it sells more full-priced products.

During Nike's latest conference call, CFO Matthew Friend said Nike would implement "low-single-digit price increases in fiscal '24" to boost its gross margins as the expansion of Nike Direct reduces some of its operating expenses. Friend also declared that with its inventory levels largely stabilized, Nike was starting fiscal 2024 on its "front foot, ready to navigate any uncertainty that may be ahead of us and ready to compete from a position of strength."

Nike's outlook seems confident, but its stock still isn't terribly cheap at 29 times forward earnings. Under Armour trades at just 15 times forward earnings, while Adidas's forward multiple is negative because it's expected to post a net loss this year. Nike also pays a dividend, but its paltry forward yield of 1.2% probably won't attract any serious income investors.

Is it time to buy, sell, or hold Nike?

I don't think investors should sell Nike if they already own it, since it's an evergreen brand that has repeatedly bounced back from previous economic downturns. Therefore, I believe Nike is still a safe stock to hold for long-term investors.

That said, I can't recommend buying more shares of Nike right now for three reasons: Its near-term growth is anemic, its margins are being squeezed, and its stock isn't a screaming bargain yet. So instead of buying Nike in hopes that it can eventually grow into its valuations again, investors should stick with more promising stocks in this unpredictable market.