About Nike

Controversial yet culturally iconic.

Nike has got to be one of the most well recognized brands on the face of the earth.

What started out as an amateur athlete’s general interest with running shoes eventually turned into a multibillion-dollar company that sells a lot more than shoes.

Everyone seems to have their opinions of Nike.

The company is typically viewed as either a slick, relatable company that allows amateur athletes to feel and look like professional athletes or they’re seen as a terrible company that exploits human rights across the globe.

Or maybe somewhere in between.

Irrespective of where you might stand on the morality of Nike, their business model or their reported political views, I just want to know if I should invest my hard-earned dollars into the company’s stock. While holding companies responsible for their actions is important, we’re not investing in companies with the supreme goal of changing the world or necessarily making it a better place; we want our investments to grow over time so we can improve our lives and financial wellbeing and help those in our communities as well.

But at the end of the day, we are not a group of activist investors looking to buy board seats or completely change Nike’s business model.

If it works, it works.

Nike sells shoes, clothes and other apparel as well as gives many famous athletes million-dollar contracts to represent the brand.

Some of their more notable athlete contracts include deals with NBA superstar LeBron James (a lifetime deal), arguably the greatest golfer of all time Tiger Woods and a billion-dollar contract with Portuguese soccer savant Cristiano Ronaldo.

That’s the core of what Nike does to drive sales and earn money in a nutshell, through athletes and for athletes.

From a strictly financial perspective, let’s try gaining a better understanding of Nike’s financials and whether or not the company’s stock deserves a spot in our investment portfolio.

Nike’s stock financials

The company currently has a market capitalization of around $166 billion, a share price of around $106 and a price-to-earnings (P/E) ratio of nearly 28.

What can we gather from this?

The company’s stock is objectively overvalued, as the stock’s current P/E ratio is considerably higher than the fair value benchmark of 20.

Given this metric off the bat, we definitely want Nike to trade at lower levels (around $80-90, or lower of course) in order to buy shares closer to fair value or even at a discount.

Skimming over to Nike’s balance sheet, the company oversees around $37.7 billion in total assets and almost $25 billion in total liabilities.

We view this as a pretty strong balance sheet mainly because the retail sector in general always tends to be messy in terms of inventory management, debt management and other factors that can be difficult for companies to control.

That being said, Nike is an industry leader when it comes to shoes and athleticwear in general, so it makes sense that their total assets comfortably outweigh their total liabilities.

It’s also encouraging that of the company’s total liabilities, a substantial amount appears long-term by nature.

Onto Nike’s income statement, the company’s total revenue has been in a general uptrend over the past five years, jumping to notably higher levels in 2021 likely due to price increases on their shoes and other apparel. This can also be gathered from the fact that their total cost of revenue spiked in 2021. In other words, Nike’s total cost(s) of acheiving revenue and ultimately selling their product(s) increased in 2021.

Overall, Nike’s total revenue has been steady to increasing over the past five years, which is a trend that will probably continue.

However, we should note that while we are confident in the company’s shoe business, we do have concerns about their apparel and clothing business. Specifically, we think people are always going to need shoes and that brand loyalty for Nike shoes is very real. However, as consumers continue to cut back on spending, they are likely not going to want to or be able to pay for relatively pricey Nike shirts, shorts or other items of clothing or accessories.

Consumers are instead worried about putting food on the table and keeping their car filled up with gas.

This could negatively impact Nike’s clothing business in the short and long run, however we are quite confident in the company’s shoe business.

Nike’s stock fundamentals

Let’s see if Nike has a “Just Do It” attitude when it comes to making a profit.

The company’s trailing twelve month (TTM) net profit margin is barely higher than that of the industry. Usually, we wouldn’t be thrilled about this, however the retail and clothing industries can be likened to Nike’s multimillion dollar athletes; competitive.

The margins in retail tend to be razor thin and the costs, even when times are good and inflation isn’t running rampant tend to be high.

While Nike plays in a relatively tough business landscape, it should invoke some confidence in investors that they are a leader and domineer in the space.

However, we would hope that Nike’s TTM net profit margin would increase in years to come, especially if or when supply chain woes subside.

From a return(s) perspective, Nike does a pretty good job.

Specifically, the company’s annual return on equity, assets and investment are all just above that of the industry. We would be slightly concerned if any of Nike’s metrics in these categories were lower than that of the industry, however this thankfully isn’t the case.

Should you buy Nike stock?

Nike is one of those blue chip stocks that you should have confidence in as an investor.

However, the price is too high. If you’re willing to pay a premium for an ownership stake in the company, we don’t think it would necessarily be a terrible idea in the long term but if you can buy the company at a lower price-to-earnings (P/E) multiple, that’s ideal.

Given the company’s leadership position, relative financial strength, long-term partnerships with some of the greatest athletes of all time, brand recognition along with its overvalued share price, we currently give the company a “hold” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.