After an incredibly rough start to the year, Nike (NKE +1.74%) is suddenly the center of attention. As of this writing, shares of the athletic footwear and apparel giant are hovering near $44 -- a price point the stock hasn't seen in more than a decade. The stock's dramatic slide over the last few years was worsened last week, following a disappointing quarterly update from the athletic shoe and apparel company. The severity of the stock's decline has sparked a wave of online chatter and made Nike stock a trending topic on X.
For value-hunting investors watching a premium consumer brand trade at a steep discount to its historical highs, the setup might look tempting. After all, market overreactions can sometimes create generational buying opportunities for patient capital.
But to understand whether this is a trap or a generational buying opportunity, investors need to look under the hood. The real issue shaping Nike's future returns is profitability. The company's earnings before interest and taxes (EBIT) margin has narrowed significantly from years past. And it will have to recover some of its lost ground for the stock to work from here.
Image source: The Motley Fool.
The margin compression problem
To understand the opportunity for Nike stock, you have to understand the issue driving shares lower recently.
During its third quarter of fiscal 2026 (a period that ended on Feb. 28, 2026), Nike delivered revenue of $11.3 billion. That top-line figure was flat on a reported basis and down 3% on a currency-neutral basis from the year-ago quarter.
The real problem, however, is what it currently costs Nike to generate those sales.
The company's EBIT margin came in at a depressed 5.6% for the quarter, down from 7.3% in the year-ago quarter.
While this narrowing EBIT margin already looks concerning -- it's even more concerning when you zoom out further.
If you zoom out five years, Nike was an incredibly efficient business. In fiscal 2021, the company's EBIT margin peaked at more than 15%. Nike's profitability levels today, therefore, represent a substantial step-down in core profitability.
So what's driving Nike's profitability lower?
The company's gross margin decreased 130 basis points to 40.2% in the third quarter. Management noted this was primarily driven by a 300-basis-point hit from higher North America tariffs.
As Nike chief financial officer Matthew Friend explained during the company's fiscal third-quarter earnings release, the company's efforts to turn around its business as part of its "Win Now" strategic plan will continue to weigh on results throughout the year.
This compounds on top of sales weakness in recent years, leading to deleveraging and a strategic decision years ago (which eventually proved to be a mistake) to focus on its direct-to-consumer business at the expense of its wholesale business -- a move that the company started reversing in 2023. These blunders have been costly to both sales volumes and its expense lines and could take years to fully recover from.
The upside of a turnaround
While a collapsed margin profile is concerning on the surface, it is also the exact reason this stock could be a good long-term stock to own.
Nike doesn't necessarily need explosive revenue growth to generate outsize shareholder returns from here. If management can simply stabilize the top line and successfully restore the company's EBIT margin to a level closer to where it was several years ago, earnings per share could absolutely surge.
The underlying business is already showing glimmers of stability beneath the consolidated headline numbers. In North America, for instance, the company actually posted 3% reported revenue growth in the third quarter, achieving positive growth across all channels for the first time in two years.
A return to a double-digit EBIT margin over the next few years would essentially supercharge the bottom line without requiring the company to sell significantly more product.
This built-in operational leverage potential is the core bull case for buying Nike at a decade low.
NYSE: NKE
Key Data Points
A rare buying opportunity
Of course, a turnaround is far from guaranteed, and the company faces formidable challenges.
The most glaring issue is ongoing weakness in its important Greater China market, where currency-neutral revenue fell 10% in the third quarter. Further, management is guiding to a severe 20% revenue drop in that region in the fourth quarter as they accelerate Nike's marketplace clean-up.
Because of these near-term hurdles and heavily depressed earnings, Nike's valuation might look a bit stretched at first glance. With the stock trading around $44, its price-to-earnings ratio of 29 doesn't appear attractive on the surface.
But that multiple is based on earnings that have been temporarily crushed by transition costs, severance charges, and heavy inventory liquidation. If you value the company based on more normalized earnings power, assuming margins eventually move toward historical norms once the supply chain and fixed-cost structure are right-sized, the stock looks attractive.
Now, is Nike stock a "generational buying opportunity"? That may be a stretch. Unfortunately, the stock is arguably already priced for explosive earnings growth.
With that said, I do think a small position could make sense. Risks seem largely priced in, and Nike has the potential to become a more timeless brand over time if it executes well and carefully protects the Nike brand's reputation.
In addition, there aren't many truly global and durable brands. Nike is one of them, making it worthy of a premium for its staying power alone.
While there is no guarantee that the turnaround will happen overnight, I believe this sell-off has created a rare opportunity to buy the shares at a reasonable price.
