The S&P 500 is up 9% year to date, and with stocks rising, it's getting harder to find bargains. On Holding (ONON -1.10%) is a fairly new stock that's down 38% since its highs. It's climbing this year, but investors should still take a look at this high-growth stock.
Why On looks like a compelling buy
You might have noticed people in your neighborhood wearing On's uniquely designed CloudTec running shoes, which The Wall Street Journal describes as looking like a "mouth in dire need of braces," or you might already be a fan. Swiss-based On has gained a large and loyal following of affluent fans who are willing to pay premium prices for its comfortable footwear. It has also developed a full line of athletic wear at prices similar to or even slightly more expensive than high-end sportswear giant Lululemon Athletica.
There's a confluence of factors that combine to make On look like a no-brainer stock right now. It's at the intersection of low brand presence and high growth, and as it continues to make itself known in new regions, there's ample opportunity to keep growth rates high. Its upscale target market gives it resilience despite harsh economic conditions, and its premium pricing and high full-price sales rate lead to robust profitability.
The company exceeded expectations in 2023, with sales up 47% year over year, or 55% on a currency-neutral basis. It reached a mid-term target of exceeding 60% gross margin in the fourth quarter, and it expects to maintain that fundamental profitability in 2024.
Management is guiding for sales to increase 30% on a currency-neutral basis year over year in 2024. Although On isn't consistently profitable yet as measured by generally accepted accounting principles (GAAP), net income increased 38% for the 2023 full year.
It has barely started in many markets
The company has a four-pronged strategy: growing its brand awareness and community, expanding its markets through a multichannel model, innovating with product development, and scaling efficiently.
Brand awareness is a big piece. It's at 6% in France and only 4% in Australia, and it has low rates of awareness in many affluent U.S. cities, such as 7% in New York and 12% in Dallas.
It's barely known in many regions, but where On has already established a presence, it has become extremely popular. That has led to some incredible growth rates, such as a two-year compound annual growth rate (CAGR) of 103% in China (between the first half of 2021 and the first half of 2023) and a 699% CAGR in the United Arab Emirates.
Managemernt is opening new stores in select areas, including its first store in Germany in March, and membership has increased ninefold since On's initial public offering in 2021.
One way On is getting its name out there is through celebrity endorsements. It currently sponsors defending New York City Marathon winner Helen Obiri and tennis champions Iga Swiatek and Ben Shelton. Tennis legend Roger Federer is such a big fan that he became an early investor.
On has strong pipeline of new products to drive engagement and growth this year, including new designs for its best-selling running shoes. It sells footwear for a range of sports, all in its signature design. And it's focused on tech and automation to scale profitably.
Is On stock a bargain?
A bargain is relative to valuation, not price, and not even price movement. But even valuation is relative; a high-growth stock demands a higher valuation than a stock with slowing or declining growth.
On stock trades at a price-to-sales ratio of 6.4, which isn't objectively cheap but could be reasonable for a high-growth stock. It might not be the classic version of a bargain, but it has immense potential and could be an incredible growth stock over the next few years.
