Nike Stock is Crashing - Here's Everything You Need to Know

Summary

The video discusses Nike's significant stock decline, down 20% after recent earnings reports and 60% from its 2021 peak. It examines Nike's revenue growth, operating income, and cash flow, noting a current stagnation and historical patterns during economic downturns. The script also analyzes Nike's financial outlook, market share, and valuation against its operating income, suggesting the stock may be undervalued but faces substantial challenges. The presenter remains cautious, highlighting the unpredictability of consumer brand trends and market competition.

Takeaways

• 📉 Nike's stock has dropped by 20% after reporting earnings, erasing 6 years of gains and falling 60% from its all-time high in 2021.
• 📊 The company's long-term revenue growth has been strong, but it appears to be topping out and not growing significantly over the past 18 months.
• 📈 Historically, Nike's revenue growth has been tied to the health of the economy, with declines during recessionary periods.
• 📉 Both Nike's operating income and earnings before tax (EBIT) are in significant correction from their all-time highs in 2021.
• 💹 Nike's cash flow has been more volatile compared to its operating income, which is more consistent and will be used for valuation purposes.
• 🔍 Key performance indicators (KPIs) show that Nike's apparel revenue has been flat for about 3 years, and footwear revenue has seen little growth in the past 18 months.
• 📊 Equipment revenue is the only segment showing an uptrend, while Converse and North America revenues have declined significantly.
• 🔍 Full fiscal year revenues were up only 1%, and the fourth quarter saw a 2% decline, indicating a potential downturn in the business.
• 📉 Nike's financial outlook for 2025 predicts a mid-single digit decline in revenue, with the first half expected to be down by high single digits.
• 💰 Despite the revenue decline, Nike managed to increase its operating income by 8% year-over-year through margin expansion.
• 🤔 The market's current valuation of Nike's stock is significantly below its historical average price-to-operating income ratio, suggesting the stock may be undervalued.

Q & A

Why is Nike's stock down significantly?

Nike's stock is down 20% after reporting its earnings, and it has lost 6 years of gains, trading at a price last seen in 2018. It's also down 60% from its all-time highs in 2021, reflecting a significant correction in the market's valuation of the company.

What has been the historical pattern of Nike's revenue growth?

Historically, Nike's revenue has grown nicely for decades, with periods of stagnation or decline during economic downturns or recessions, such as in 1993, during the tech bubble, and from 2008 to 2010.

How has Nike's operating income performed over the long term?

Nike's operating income has shown long-term growth but is currently in a significant correction from its all-time highs in 2021.

What does Nike's cash flow statement reveal about the company's financial health?

Nike's cash flow has been more volatile than its operating income, which is why the video creator opts to use operating income as a more consistent metric for valuing the stock.

What are Nike's key performance indicators (KPIs) showing in terms of revenue from different segments?

Nike's apparel revenue has been flat for about 3 years, footwear revenue isn't growing much, equipment revenue is the only segment showing an uptrend, and Converse revenue has been declining significantly since Q1 2023.

How did Nike perform in its most recent fiscal year compared to the prior year?

For the full fiscal year, Nike's revenues were up only 1%, from 51.2 billion to 51.4 billion, indicating a slowdown in growth.

What was the year-over-year performance of Nike's revenue in the fourth quarter?

In the fourth quarter, Nike's revenue was down 2% year-over-year, showing a decline despite operating income increasing by 39% for the quarter and 8% for the full year.

What is Nike's financial outlook for fiscal 2025?

Nike expects its revenue to decline in the mid-single digits for fiscal 2025, with the first half of the year expected to see a high single-digit decline.

How does Nike's current stock price compare to its historical average price-to-operating income ratio?

Nike is currently trading at a price-to-operating income ratio significantly below its historical average, suggesting that the stock may be undervalued relative to its past performance.

What is the potential for Nike's stock to deliver market-beating returns based on a discounted cash flow (DCF) calculation?

If Nike can grow its operating income by 4.6% annually over the next 5 years, buy back shares, grow its dividend, and maintain a price-to-operating income ratio of 20, the stock could deliver a compounded annual return of about 11%, which would be a market-beating return.

Why might an investor consider Lululemon over Nike, based on the video's analysis?

An investor might consider Lululemon because it is seeing revenue growth of 16% year-over-year and projecting 10% growth for the next fiscal year, suggesting a stronger business performance and market share gains compared to Nike.