Nike Stock: Still Wildly Expensive

Shares of footwear giant Nike (NKE) are attempting to stage a comeback from a peak-to-trough plunge that saw it lose over a third of its value.

Though Nike has one of the most potent brands on the planet, with considerable pricing power to make it through the recent storm of inflation, its stretched valuation could limit further upside. Add increasing chances of a 2023 economic recession into the equation, and Nike stock may struggle to regain its footing.

The company’s management team has done an incredible job of moving past supply chain challenges over the past year.

Demand for high-end footwear and other sports apparel has been remarkably robust, even with supply constraints that Nike expects to overcome.

That bodes really well for a consumer discretionary firm like Nike. Still, questions linger as to what the consumer’s mindset will be a couple of quarters from now.

For now, I am bearish, as I think the rich valuation doesn’t fully factor in the potential risks over the medium term.

Is Netflix a Warning Sign?

Netflix (NFLX) got a rude awakening, with subscribers hitting that cancel button, inducing one of the worst sell-off in Netflix’s history.

Arguably, Nike has far better purchasing power on its high-end footwear and other articles of clothing. If anything, some of Nike’s more expensive sneakers, many of which have a cult-like following, could be in even higher demand as Nike gradually raises prices across the board.

Still, Netflix’s subscriber drop raised some concerns for the health of the consumer. Was the recent barrage of subscription cancellations a Netflix problem? Or does it point to the fading health of the consumer?

The former scenario seems likely, given that Netflix management may have made more than its fair share of missteps. Still, the latter scenario is worrisome for consumer discretionary plays, including Nike.

Inflation is taking a growing bite out of our wallets, and with a potential recession to worry about, it’s not a mystery as to why some may be pulling back on the spending on “nice-to-haves.”

As more quarters are revealed, we’ll get a better gauge of the consumer. For now, it’s clear that consumers are resistant to the effects of inflation, and naturally, they’re going to gravitate towards offerings of better value in a competitive market.

Fortunately for Nike, it looks to have a much wider moat, thanks to its powerful brand. This brand can help Nike move through a bumpy inflationary finish to 2022.

Nike Continues Firing on All Cylinders

Though the footwear arena is getting more competitive, with top rival Lululemon (LULU) looking to get in on the action, I think Nike shareholders don’t have to lose any sleep about a significant loss of share.

If anything, Nike’s incredibly strong direct-to-consumer (DTC) presence could pave the way for the firm to take share in the future. Indeed, Nike’s digital strategy has paid meaningful dividends.

As the company invests more in the digital experience, consumer demand could really power higher come the next phase of the market cycle.

Nike continues firing on all cylinders. For a retailer, it’s doing almost everything right on the digital front. Still, the valuation appears to be stretched, with NKE stock trading at around $132 per share. The stock trades at a frothy 35.8 times trailing earnings at such a price.

Further, Nike’s elevated multiple could cool off as investors ditch growth and hefty price-to-earnings (P/E) multiples for value plays with high dividends to improve their odds of beating inflation, and ending the year with a positive real return.

As investors factor in the rising odds of a recession, Nike could risk slipping towards its 52-week lows just shy of the $117 mark. Discretionary firms tend to take a big hit to the chin when the consumer is forced to cut away at expenses, starting with the “wants” like the latest Jordan sneakers.

Wall Street’s Take

According to TipRanks, NKE stock comes in as a Strong Buy. Out of 24 analyst ratings, there are 18 Buy recommendations and six Hold recommendations.

The average Nike price target is $166.09, implying 25.2% upside potential. Analyst price targets range from a low of $140 per share to a high of $195 per share.

Bottom Line on Nike Stock

Over the long haul, Nike’s innovative efforts will apply upward pressure on margins. With a growth runway in the Chinese market, which is experiencing a booming middle class, Nike’s long-term growth story still looks bright.

Unfortunately, there will be no shortage of potholes over the nearer-term en route to higher levels, especially if the consumer isn’t as robust as most bulls think.

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