Nike (NYSE:NKE) recently reported its first-quarter results for Fiscal Year 2023, which looked solid at first glance. The sports apparel titan generated a whopping $12.7 billion in sales, with earnings per share hitting $0.93, exceeding Wall Street analyst expectations. However, despite the impressive numbers, the company’s stock crashed by double-digit margins. Nevertheless, the steep drop represents an excellent opportunity to load up on such a high-quality stock. We are bullish on NKE Stock for the long term.
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Nike’s market value has fallen over 45% so far this year. The shoe company isn’t looking like a growth stock anymore and faces major challenges in two of its main markets. Multiple problems have hit Nike in China and the U.S., along with increased inventory levels that may result in a further decline in profits. Nevertheless, investors are being offered a massive discount considering these factors.
The company’s near-term uncertainty means investors can buy its stock at a valuation of 29 times this year’s consensus earnings estimate, which is 20% lower than its five-year average. NKE’s valuation remains attractive, and it seems that the stock has bottomed out.
We retain our conviction that the long-term bull case for the company is in place with the potential to generate massive revenues and profits for the foreseeable future. Additionally, investors should note how global supply chain headwinds are easing even further into September.
Recovery in China Could Help Nike Stock
The Chinese economy has been in the dump for over a year, but there are signs that things may be changing. While strict environmental policies and property market woes contributed greatly to its recent struggles, these problems seem poised to subside going forward with improving economic activity.
Recent data showed that China’s industrial profits dropped 2.1% from the prior-year period between January-August, but saw a marked improvement last month. The recent performance of China’s economy has been very encouraging, and it seems like the country is on its way back. China’s top national statistics bureau also remarked that profits for foreign firms are rebounding.
While it is too early to tell what the effects of a U.S. recession will have on Nike, the tailwinds from China could help offset losses from the U.S. segment. The company’s diverse global footprint means that even with a strong dollar, Nike has been able to grow revenues.
What is Nike’s Outlook?
Nike sees the light at the end of its current challenges. Executives believe inventory levels have peaked, and an improvement in sales could create plenty of momentum for the company in the next few quarters.
Nike faces an interesting balancing act. Nike needs to make sure there are enough products on hand in case of high demand. If they don’t have enough, it leads to a loss of sales and customers opting for other brands. However, too much merchandise ties up cash that could go towards marketing, research, or shareholder rewards.
Nike has struggled in the past couple of years but has still managed to hold firm. Inventory levels increased by over 44% during the quarter. The inventory headwinds are just going to work themselves out eventually. However, the company could be in for more weak results ahead.
Its executives say that the promotional environment could last another calendar year, and they’re also cautious about China’s economy. Nike is adjusting its profit outlook as it clears away what’s left of this year to make way for a smoother holiday shopping season.
When looking at the big picture, Nike has been around for 30 years and remains one of America’s most recognized brands. This sustained consumer relevance gives it increased power to weather any near-term challenges that may arise because of its position as an industry leader.
Is Nike Stock a Buy or Sell?
Turning to Wall Street, NKE stock maintains a Moderate Buy consensus rating. Out of 28 total analyst ratings, 17 Buys, 11 Holds, and zero Sells were assigned over the past three months. The average NKE price target is $109.92, implying a 24.1% upside potential. Analyst price targets range from a low of $79 per share to a high of $185 per share.
Takeaway: Short-Term Headwinds Create a Long-Term Opportunity
For those investors who can look past the current inventory problem and believe in Nike’s long-term prospects, now is a great time to buy shares at 50% off its all-time high. Investors could enjoy healthy returns as Wall Street expects NKE to face slowing growth and falling profit margins this year.
Moreover, you should invest in Nike for its robust brand, which has always been strong and has maintained its popularity over time with the world’s elite athletes and teams. This gives them a strong advantage in competing against other companies and is likely to be a long-term growth driver for the business.
However, you must be prepared for some bumpy results as we advance. Moreover, it’s likely to be volatile in the stock market. Still, at its current price, it is very attractive given the quality of the stock.
