Swiss athletic footwear and apparel maker On Holding (ONON 2.66%) has grown a lot faster than American industry bellwether Nike (NKE 0.19%) over the past few years. But here's an ironic twist: On probably wouldn't exist without Nike.
Olivier Bernhard, a former Swiss Ironman champion and Nike athlete, originally pitched his design for a proprietary "cloud" shoe cushioning technology to Nike. These cushions, which were developed by studying the flexibility of garden hoses, would relax when a runner's foot was in the air but tighten up for a firmer foundation when it hit the ground.
Image source: Getty Images.
After Nike rejected that idea, Bernhard partnered with David Allemann and Caspar Coppetti to sell its "CloudTec" shoes through a newly created company called On in 2010. On subsequently became the top footwear brand in Switzerland, gained a mid-single-digit share of the U.S. footwear market, and expanded into China in 2018.
On went public at $24 per share on Sept. 15, 2021, and its stock hit a record high of $51.45 just two months later before dropping back to about $28. That was a wild ride, but Nike's stock has declined more than 30% since On's first trading day. Let's see why On stayed ahead of Nike over the past two years -- and if it's still the better long-term play.
On still has plenty of room to run
On's revenue rose 59% in 2020, 70% in 2021, and 69% in 2022. It continued growing throughout the pandemic, as it sold more products online to offset the temporary closures of brick-and-mortar stores. Its growth was driven by a disciplined focus on full-price sales, the rollout of new premium shoes, the expansion of its direct-to-consumer (DTC) channels (36% of its 2022 sales), and its expansion beyond Switzerland into more international markets.
On expects its revenue to rise another 46% to 1.79 billion Swiss francs ($2.1 billion) for 2023. That would represent a compound annual growth rate (CAGR) of 61% from 2019.
On aims to "at least" double its annual revenue to 3.55 billion Swiss francs ($4.2 billion) in fiscal 2026, which would represent a CAGR of 26% over the next three years. UBS recently predicted On could grow at a CAGR of 45% over the next five years as it launches new products and expands into more overseas markets.
On wasn't profitable at the time of its IPO, but it turned profitable in 2022. Analysts expect its net profit to grow at a CAGR of 66% from 2022 to 2025. Its gross margin rose from 54% in 2020 to 56% in 2022, and it expects that figure to exceed 59% in 2023 as it exercises its pricing power and expands its higher-margin DTC business. Over the long term, it expects its gross margin to exceed 60%.
Those are stunning growth rates for a stock that trades at three times next year's sales and 39 times forward earnings. Therefore, On's big pullback certainly seems like a buying opportunity for growth-oriented investors.
Nike faces much tougher challenges
Nike's revenue fell 4% in fiscal 2020 (which ended in May 2020) as the pandemic shut down its wholesale and first-party stores. In fiscal 2021, its revenue rose 19% as the pandemic passed and it expanded its Nike Direct DTC business.
But in fiscal 2022, Nike's revenue grew a mere 5% as it grappled with new COVID lockdowns in China, supply chain disruptions, and inflationary headwinds for consumer spending. In fiscal 2023, its revenue rose 10% as its business stabilized. That stabilization was led by the 14% growth of its DTC business, which accounted for 42% of its top line.
However, a lot of that growth was driven by steep markdowns. That pressure, along with higher logistics costs and currency headwinds, reduced its gross margin by 250 basis points to 43.5% in fiscal 2023. Its gross margin slightly recovered to 44.4% in the first half of fiscal 2024, but its revenue rose only 1% year over year.
Nike warned investors that its revenue growth in the second half of fiscal 2024 could be even "softer," but analysts still expect 1% growth for the full year as its tighter spending lifts its earnings per share by 12%. That slower sales growth suggests that Nike could be struggling to keep up with faster-growing competitors like On.
From fiscal 2023 to 2026, analysts expect Nike's revenue and net income to grow at a CAGR of 6% and 13%, respectively. However, its stock doesn't look cheap at 29 times forward earnings and three times next year's sales.
The better buy: On Holding
On is a still a tiny newcomer compared to Nike, but its stronger revenue growth, higher gross margins, and disciplined expansion into the premium footwear market should make it a more compelling play for growth-oriented investors. On also trades at comparable valuations to Nike but has a lot more runway ahead -- so it's definitely the better buy right now.
