There isn't a better tool available to the average person when it comes to building lasting wealth than the stock market. Over many years and decades, what seems like a small sum of cash can turn into a massive capital base.
If we look back at history, we'll see that some industry-leading firms have rewarded investors in a profound way. Nike (NKE -0.31%), the sports apparel and footwear juggernaut, has done just that. Since its initial public offering in late 1980, shares have produced a total return of about 80,000%, turning a $1,000 investment into more than $800,000 today.
Let's look back at what helped get Nike to this point before considering if the consumer discretionary stock is a worthy buy for prospective investors.
Nike is a global icon
From a purely fundamental perspective, the main reason Nike's stock has performed so well over the past four decades is because of steadily rising sales and earnings. It's really that simple. Nike's fiscal 2023 revenue of $51 billion and net income of $5 billion were astronomically higher than they were in the 1980s. Strong fundamental results drive share gains.
But digging a bit deeper can help us understand what exactly drove that performance. I believe there are three primary factors that have propelled this business.
Perhaps the most important variable driving Nike's success, making it the cultural icon that it is today, is its powerful brand. There's no doubt that this is one of the world's most valuable brands, with recognition that rivals that of dominant enterprises like Apple and Coca-Cola. This gives Nike the ability to charge premium prices for its products.
To be clear, though, Nike's brand wasn't created overnight. This business is in a league of its own when it comes to marketing and storytelling. Having a superstar roster of athlete endorsements helps, too, from Michael Jordan in the 1980s (a partnership that is still thriving today) to LeBron James and Cristiano Ronaldo today. This keeps the brand relevant, making up its economic moat.
Another critical factor is Nike's relentless focus on product innovation and, more recently, its digital foundation. Management calls this strategy Consumer Direct Acceleration. The goal is to continue introducing a fresh lineup of clothing and footwear that resonates with customers while creating tech-enabled channels to reach them.
I'll also point to Nike's global reach as a key reason that it's become so successful. This is one of the few western brands that has a leading industry position in China, a country it's had a presence in for quite some time. In fact, Nike generates more than half of its annual revenue from outside North America. Having broad appeal is what every company strives for.
Should you buy Nike stock right now?
If we zoom out and look back at the last 40 or so years, it's impressive what Nike has been able to accomplish. But if you're an investor considering adding this stock to your portfolio, it's best to view things with a fresh perspective.
As of this writing, Nike shares are down 48% from their peak, which was set in Nov. 2021. Part of the explanation for that dip is stagnating sales, as the business is only projecting a 1% revenue gain this fiscal year. Macro headwinds are negatively impacting Nike at a time when a smaller rival like Lululemon is consistently posting double-digit top- and bottom-line growth.
Plus, Nike stock trades at a price-to-earnings ratio of 27. That's a steep valuation for a struggling company that doesn't possess the expansionary runway it did in the past. So, it's best to pass on the shares today.
