Nike stock has underperformed the market so far in 2014. Credit: Nike.

Since 1964, Nike (NYSE:NKE) has steadily built a massive global empire in the sports apparel and footwear markets. Last fiscal year, for example, Nike became one of the latest components of the Dow Jones Industrial Average, grew revenue 10% to $27.8 billion, and achieved net income of $2.7 billion. But for all its strength, Nike stock has climbed only around 5% so far in 2014, compared with a nearly 10% return from the S&P 500 over the same period.

That's only a small snapshot in Nike's long history, and it certainly doesn't guarantee that its shares will continue to underperform going forward. But in the interest of looking at both sides of the coin, let's explore three key risks facing Nike today.

Smaller competitors are encroaching on Nike's turf

First, it's no mystery that up-and-coming competitors regularly aspire to become the next Nike. Among them is Baltimore-based Under Armour (NYSE:UAA), which is nearly five times smaller than Nike in terms of market capitalization and expects to generate revenue of "only" around $3 billion for all of 2014 -- a 29% jump over last year. More than 90% of that revenue will be generated in the U.S., which means Under Armour will pose an even greater threat as it begins to ramp up its international expansion later this year.

And it doesn't stop there: Under Armour also regularly tries to nab Nike's high-profile sponsorships as they expire, including its recent $285 million one-up bid to lure NBA MVP Kevin Durant away from the swoosh. After that bid failed, Under Armour CEO Kevin Plank still mused: "Do I take pleasure in that they paid $150 million more than they planned on paying? Absolutely."

In the end, if Under Armour continues its astronomical rise, it's apparent Nike has the most to lose.

Nike is still struggling in the Middle Kingdom

Another area for risk-averse investors to watch is Nike's business in Greater China, which is still undergoing a "reset" after suffering through a several-quarters-long decline in year-over-year revenue dating back to late 2012. However, Nike's most recent quarter saw China revenue climb 2% year over year to $702 million -- or roughly 10% of Nike Brand revenue -- sparking optimism from investors that the worst may be over in the region.

But while the management team states that they've made great progress with investments in Chinese inventory management and the direct-to-consumer business there, they simultaneously admitted that they "still have work to do" in the country of more than 1.3 billion consumers. Keep a close eye, then, on whether that work continues to bear fruit in the coming quarters.

Nike must actively account for currency fluctuations

Finally, as a global business, one of Nike's biggest challenges in delivering consistent growth lies in managing currency headwinds. Of course, this can also go both ways, but remember that shares plunged two quarters ago after CFO Don Blair told investors that "this [fiscal] year's devaluation of developing market currencies will be a significant drag on next year's reported revenue, gross margin, and profit growth."

This doesn't seem entirely fair, considering that the negative effects of currency fluctuations aren't exactly Nike's fault. As I wrote at the time, this "doesn't mean Nike is a broken stock. Instead, it's merely one of the pitfalls of operating a multibillion-dollar business on a global scale."

At the same time, Nike has multiple financial levers it can pull to mute the effects of such currency volatility, including temporarily minimizing the level of receivables in those respective markets. But that doesn't mean Nike will be capable of perfectly managing such fluctuations in perpetuity.

Foolish takeaway

In the end, Nike is still an incredible, solidly profitable business with plenty of room to grow despite its massive size. Even so, Nike still faces key challenges in up-and-coming competitors, ongoing struggles in China, and negative effects on both its top and bottom lines of global currency fluctuations. Nike may well be able to handle these threats in stride, but long-term investors should be mindful of the resulting risk.

Steve Symington owns shares of Under Armour. The Motley Fool recommends and owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.