Nike (NYSE:NKE) stock is approaching its 52-week low reached in July. This presents an interesting dilemma for investors. On the one hand, if the stock holds the July lows as a support level, a technical argument can be made that NKE stock is oversold.
On the other hand, a weakening economy supported by slowing earnings and revenue growth suggests that there may not be room in consumers’ holiday budgets for footwear and accessories. the company’s high-end sports equipment. This would suggest that NKE stock could still be overvalued.
Could the answer be both? And if so, what should investors do about NKE shares? These are the questions we will examine in this article.
Will Nike’s nod to authenticity work?
As I’m not a sneakerhead, Ben Schott’s article for Bloomberg was new to me. Specifically, Nike has launched its NikeCraft x Tom Sachs general purpose shoe. The signature corporate message was:
“Your sneakers shouldn’t be the most exciting thing about you. They’re tools, and what matters with your tools is that they work. They do their job so you can do yours. You put them on and you forget them.
And yet, these tools come with a hefty price tag of $109. But that could be considered a discount, because with NIke, it’s all about the swoosh. And these shoes still carry this cache.
The success (or lack thereof) of this campaign can speak volumes about the near-term direction of NKE stock. I remember in the early 1990s Cadillac tried to launch an “downstream” sedan called the Catera to a younger market. But as one car dealer told me, the strategy backfired because the Catera attracted some of the older (and higher-margin) buyers who paid cash for the Catera instead of buying older, more expensive models.
Could the same situation happen with Nike? I am not sure. It seems to me that the shoes could become collectibles. Or they could cannibalize the company’s more expensive offerings. Either way, I’m skeptical of their appeal as casual shoes for everyone.
Fundamentals can improve
Alright, enough cynicism. Let’s move on to some numbers. The problem for Nike is that in the past two quarters, it has had lower year-over-year revenue and profit. Let me be clear. The company beat analyst estimates in both quarters, but the numbers were lower than the same quarter a year earlier.
What does that mean? The answer to this question is why stock picking is as much an art as it is a science. As Matthew North wrote, Nike has an advantage in both margins and profitability. This leads me to believe that some of its total customer base is falling apart, but the brand’s die-hard loyal followers continue to support the brand.
And the company is expected to post high single-digit revenue growth and double-digit profit growth over the next five years. But that could be pulled if the company lowers its forecast.
Should investors just buy it?
In a volatile market like this, Nike falls into an interesting category. It’s a company with pricing power, but its products may not reach that “gotta get it right now” level like Apple (NASDAQ:AAPL) and its iPhone.
But again, I’m not a sneakerhead. And this is where I can afford to listen to a bullish argument. Because it is always more important to pay more attention to what the consumer is doing (which is a lagging indicator) than what the consumer is saying (which is a leading indicator).
NKE shares are falling to an attractive level and although the dividend is not particularly impressive, the company has been increasing it for 21 years.