Shares of shoe company On Holding (ONON 2.66%) rose by 57.2% in 2023, according to data provided by S&P Global Market Intelligence. Indeed, the stock had already climbed by that much in the first three months of the year. And at one point, it was up by 113% year to date before slipping in the second half.
The company's full-year chart offers some clear indicators of when the most significant events took place for On Holding stock -- starting with 2023's biggest jump, which happened in March.
On March 21, On Holding reported its complete financial results for 2022. The running shoe company's products are really gaining traction with consumers, and its stellar top-line growth of 68.7% showed that. The company was also profitable in 2022, with a net profit margin of 4.7%.
The high revenue growth and profitability excited investors, who sent the stock soaring early in 2023. Moreover, the guidance management gave for 2023 at that time was also promising.
For 2023, On Holding's management said that it expected to grow its net sales by at least 39%. Additionally, the issues in the global supply chain were easing, which the company believed would lower its shipping expenses and push its gross margin to 58.5%.
As of this writing, On Holding has reported financial results for the first three quarters of 2023. With each of those reports, management raised its full-year expectations for net sales. And when it delivered its Q3 results, it raised its gross margin expectation for the year to 59%. In short, the company has underpromised and overdelivered so far with its 2023 results, and investors responded by propelling the stock to a market-beating performance.
So why did On Holding stock pull back in the second half?
I won't belabor the point, but I do believe that valid valuation concerns crept up with On Holding stock in 2023. At one point, it traded at nearly 10 times its trailing sales. And even now, after its pullback, it trades at nearly 6 times trailing sales, which is high compared to most shoe stocks.
ONON PS Ratio data by YCharts.
The counterargument, of course, is that On Holding is not most shoe stocks. It's growing faster than all other publicly traded shoe companies. Its gross margin is creeping toward 60%, which only trails Birkenstock's gross margin of 60.9%. And finally, it's profitable. There's little not to like here.
How high is On Holding's ceiling?
When it comes to stocks with high valuations, it's important to consider the question of how big the business can become.
With On Holding, there's significant promise regarding its adoption in the jogging community. For example, the 2023 woman's division winner of both the Boston Marathon and the New York City Marathon was wearing On Holding running shoes, which definitely helped it gain brand awareness. And there are even rumors that golf legend Tiger Woods could join On Holding's team now that he's ended his sponsorship deal with Nike.
When it comes to On Holding's long-term potential, management is confident. At the company's investor day presentation in October, management said it expects to double sales by the end of 2026 and have gross margins above 60%. Hitting those goals would certainly go a long way toward supporting its lofty valuation, and that outlook is worth investors' consideration as they think about this growth stock.
