One of the most iconic sports brands to exist in recent decades is Nike (NYSE:NKE). Yet the US stock has fallen by 32% over the past year. Following the full-year earnings report in late June, the Nike share price dropped 20% in a single day. But given the pedigree and track record of the firm, is this a great stock to buy for my portfolio?
Hard to stay at the top
The business has been struggling in recent years for a variety of factors. One is the rise of competitors, such as On Holding and lululemon. One specialises in footwear, with the latter producing gym- and yoga-specific sports clothing. Nike’s spread across many different product lines and different sports. Therefore, it has lost ground to these more specialist companies.
Another factor’s been the recent reorganisation at the company. It used to split the divisions based on individual sports. This changed to now just having lines based on men, women and children. I think this was a mistake, and clearly some shareholders agree with me.
Splitting the lines by demographic is too vague. It needs to be focused on key sports. Granted, this might mean pulling out of certain areas where it isn’t profitable enough. But I think that would be more efficient than what it has decided to do.
Too far, too fast?
Part of the argument as to why this could be a good stock to buy relates to the swiftness of the fall. In the June earnings filing, reported revenue was up 1% versus last year and net income rose by 12%. These results weren’t amazing, but not a complete disaster. Even with the disappointing outlook, did the share price really deserve to fall so aggressively?
The price-to-earnings ratio is 19.70. So even with the sharp adjustment lower in the share price, I wouldn’t exactly say it’s cheap. A good benchmark figure I use for the ratio is 10. Of course, for growth stocks, this can be higher. But at close to 20, I struggle to see this as a great dip to buy.
At the lowest level since the pandemic, some might argue that this is a good time to buy, ignoring the valuation. It’s true that Nike’s overcome difficulties in the past and managed to innovate over the decades. CEO John Donahoe is experienced and has been in the top role at Nike for almost four years. Therefore, the stock could gradually recover in the long term.
Not for me
As much as I love snapping up a bargain, I just don’t see Nike as being an undervalued purchase right now. Of course, I could be wrong. If the business can wrestle market share back from others, profitability could help drive the stock higher. Yet, until I can see that the business has made some strategy changes that are working for the better, I think I have better options elsewhere.
This post was originally published on Motley Fool
