NIKE (NKE) Could Be 9% Overvalued Following Its Power Rack Expansion
NIKE (NKE) is expanding its Nike Strength Pro Equipment line with a new Power Rack ecosystem tailored for elite training facilities, giving investors a fresh product angle to watch alongside the ongoing turnaround story.
NIKE’s new Power Rack launch comes at a time when sentiment is still weak. The share price is down 39.57% year to date and the 1 year total shareholder return has declined 47.15%, adding to multi year underperformance as the 5 year total shareholder return has fallen 73.92%.
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Nike is still a global force in athletic gear, yet the stock has fallen close to 80% from its peak and trades near a 12 year low. Does that price fairly reflect the turnaround work under way, or does it overshoot it?
Most Popular Narrative: 4% Overvalued
At a last close of $38.24 versus a narrative fair value of $36.83, NIKE is framed as slightly overvalued, which puts more weight on the assumptions sitting underneath that estimate.
Nike runs with a solid operating margin above the ~10% mark, which shows it still has some competitive advantage over competitors, even with the maturity of its business and a highly competitive industry. Despite currently having flat revenue growth, its projections point to a slightly below economy growth rate of ~3% over the next couple of years. The fact that the ROIC is almost double its cost of capital is good to see.
The narrative leans heavily on solid margins, a strong return on invested capital and modest revenue growth expectations. You can review how those inputs, plus a specific profit trajectory and exit multiple, combine to support that $36.83 figure and the slight premium at today’s price.
Result: Fair Value of $36.83 (OVERVALUED)
Have a read of the narrative in full and understand what's behind the forecasts.
However, this NIKE narrative could be shaken if revenue growth stalls from the current 2.7% annual pace or if margins compress due to rising competition and discounting.
Find out about the key risks to this NIKE narrative.
Another View On NIKE’s Valuation
The user narrative argues that NIKE is slightly overvalued at $38.24 because the $36.83 fair value estimate is based on a weighted blend of DCF, EPS and EV/EBITDA work. Our SWS DCF model presents a different perspective. It suggests NIKE is undervalued, with future cash flows indicating a fair value of $41.76.
The difference between $38.24 and $41.76 is not large, but it does change the interpretation. One view points to limited upside at today’s price, while the other views NIKE as trading at a discount to its cash flow profile. Which set of assumptions seems more appropriate to you as an investor considering the turnaround risk?
Look into how the SWS DCF model arrives at its fair value.
Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out NIKE for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 54 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.
Next Steps
Given the mixed sentiment around NIKE, this is a moment to move quickly, examine the underlying data for yourself, and decide where you stand. You can weigh both the concerns and the potential upsides in one place through the 2 key rewards and 1 important warning sign.
Looking for more investment ideas beyond NIKE?
If you stop with NIKE, you risk missing other opportunities that fit your goals. Take a few minutes now to size up fresh ideas that could suit your portfolio.
- Target stability and staying power by scanning companies with stronger balance sheets through our list of solid balance sheet and fundamentals (52 results).
- Hunt for value by reviewing our 20 high quality undiscovered gems that some investors use to spot quality before it is widely followed.
- Strengthen your income options by checking stocks in the 11 dividend fortresses that many investors watch for higher yield potential.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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