When investors think of athletic apparel brand names, Nike is often the first that comes to mind. And rightfully so. After all, it's the single biggest name in the business, having dominated the market since the 1980s.
For investors, though, everything is relative. While being big certainly has its advantages, sometimes it's the smaller, newer names in an industry offering up the better growth opportunities.
That's the crux of the bull case for high-end sports apparel name On Holding (ONON 2.66%) right now. It's only a fraction of the size of Nike (and may never be as big), and its relatively small size and tighter focus on one sliver of the athletic apparel market position the company for much faster growth.
Here's a look at the three reasons you might want to buy the stock sooner rathan than later.
1. There's room for a new premium brand name in athletic apparel
Although Switzerland-based On Holding makes a range of apparel, footwear is by far its biggest business. On's competitive edge, however, is quality. Its customers pay a premium for its running, hiking, tennis, and lifestyle shoes, but they get a premium product for their money.
That's not to suggest Nike's products are of subpar quality. But again, the marketplace is changing. Millennials and Gen Z consumers in particular love On Holding's shoes for their utility as a status symbol and their amazing functionality and comfort.
This demand is apt to grow. Analysts with TD Cowen note that these two age groups already enjoy $165 billion in annual purchasing power in the United States alone. They're also set to inherit tens of trillions of dollars of wealth over the course of the next couple decades. Moreover, as soon as 2028, Gen Z and millennials will collectively make up 68% of the U.S. population, versus only 45% now. That's one heck of a tailwind brewing.
2. On Holding's incredible growth outlook is actually credible
On Holding has plans ... big plans. In fact, they're so big they're almost unbelievable. The company expects to double this year's expected revenue of $2.1 billion by 2026 with a 26% compound annual growth rate. Meanwhile, it wants to push its gross margin above 60% and widen its EBITDA margin from around 17% now to more than 18%. Most young companies like this one need to spend heavily at this stage of their existence, which eats away at profitability.
Just bear in mind that On is already growing quickly enough and cost-effectively enough to achieve its targets. Sales through the first three quarters of 2023 were up more than 57% year over year, and EBITDA nearly doubled during that time.
And On Holding is generating this growth exactly where it needs to -- its direct-to-consumer business and its online efforts in particular. Direct-to-consumer market research outfit ESW reports one-fifth of millennials say they're going to make more online purchases of footwear and apparel this year than they did in 2022 (and they were already spending a lot online). When the category is switched to luxury goods, nearly one-third of millennials said they planned to make more online purchases in 2023.
These data nuggets offer just a glimpse into how the marketplace is evolving as the digitally native demographics grow up.
3. Both Wall Street and insiders are bullish on the company
Last but not least, On Holding's employees and founders own roughly one-third of the company as well.
Bear in mind some of these shares are likely being offered in lieu of larger paychecks. Young up-and-coming companies often lack the cash to attract top candidates, whereas it's relatively easy to issue shares and pay these employees with stock.
Regardless, the high insider ownership aligns management's interests with those of other shareholders.
As for Wall Street, of the 19 research analysts covering the stock, 14 of them deem it a strong buy. The analysts' average price target of $36.09 points to a nearly 30% gain for the stock in the near term.
These aren't usually core elements of a bull case for owning a stock; past and projected results should be an investor's top criteria when investing. On Holding isn't your usual prospective investment though. It's a young company and an even younger stock. It's still developing its stride as a public company, but the strong analyst recommendations and significant insider ownership certainly boost the overall story.
