Despite being a leader in the global sportswear market, Nike (NKE 0.23%) has made it extremely easy for investors to be bearish about its business lately. In the past five years, its share price has tanked by 43% (as of Oct. 3). Nike now trades 59% below the record high it set in November 2021.
Contrarian investors might view this as an opening to put some money to work. But is this consumer discretionary stock a brilliant buying opportunity over the next five years? There are legitimate arguments on both sides of the question.
Image source: Nike.
Nike's worst days might be over
Over the past several quarters, Nike's revenue has been under immense pressure. Investors just got a glimmer of hope, though.
On Sept. 30, the company reported financial results for its fiscal 2026 first quarter (which ended Aug. 31), and they could be signaling that the company's worst days are in the past. It was encouraging that revenue increased 1% year over year to $11.7 billion, coming in better than Wall Street expected. And it was great to see sales in North America grow by 4%. Other wins occurred in the wholesale segment, where revenue rose by 7%, and sales for Nike Running were up 20% as the business fought to regain some of the market share it had previously lost to rivals.
However, diluted earnings per share (EPS) declined by 30% year over year. Nike has been clearing out older inventory, which has resulted in more sales of discounted merchandise, which has hurt its margins. It also won't help that the new U.S. tariffs are expected to boost the company's costs by $1.5 billion this fiscal year alone.
Investors should be cautiously optimistic about how Nike will fare in the upcoming holiday shopping season. The Federal Reserve has started to cut interest rates, embarking on a more accommodative path of monetary policy. This could lead to stronger consumer confidence and a boost in consumer spending.
But Nike isn't in the clear just yet. "We expect Q2 revenues to be down low single digits," said CFO Matt Friend on the fiscal Q1 earnings call.
Having a strong brand is a key advantage
Nike's most important asset is its brand name. A decades-long track record for producing popular apparel and footwear, coupled with influential marketing campaigns and endorsements from high-profile athletes, has lifted the brand into an enviable position.
Recently, Nike has faced weakening demand due to lackluster product innovations and intense competition. However, given the brand's global recognition, broad distribution, and its unmatched relationships with top sports leagues and athletes, it will always be top-of-mind for consumers. This gives Nike a solid foundation to operate from. If it veers off track (as it has), the leadership team can leverage the power of the brand in its efforts to get the company back on course.
The stock is cheap on a normalized basis
As mentioned, Nike is trading well off its peak. However, its price-to-earnings (P/E) ratio of 36.9 doesn't entirely reflect that this is a challenged business.
Perhaps that shows that valuing it now based on its diluted EPS figure is not the right approach, as the bottom line has been negatively impacted by the company's struggles. If Nike's net profit margin was currently at its 10-year average of 10%, it would have diluted earnings of about $3.12 per share. Based on that normalized figure, the stock's P/E ratio would be a much cheaper 23.
This setup could be enticing for prospective investors looking to bet on a turnaround play. However, investing in Nike today still seems like a risky move because it could be a while until the company's earnings start to grow at a healthy clip. Should things work out well, the upside over the next five years from today's starting point could be significant. But Nike stock isn't a brilliant opportunity based on the reality of the business right now.
