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.

Outlines

00:00

📉 Nike's Stock Performance and Financial Analysis

The video discusses Nike's significant stock decline, with a 20% drop after its earnings report, erasing 6 years of gains and reaching a low not seen since 2018. The presenter aims to analyze Nike's financials to understand the reasons behind the stock's poor performance. Key points include a review of Nike's revenue growth, which has been historically tied to economic cycles, showing periods of stagnation during recessions. The video also examines Nike's operating income and earnings before tax, which are currently in correction, and delves into the company's key performance indicators, revealing a decline in certain areas such as apparel and equipment revenue, while the business in North America and Europe is also facing challenges.

05:01

🔍 Nike's Financial Outlook and Valuation

This section of the script provides an in-depth look at Nike's financial outlook, highlighting the company's guidance for a decline in revenue in fiscal 2025 and a significant expected decrease in the first quarter. The presenter uses Nike's operating income to value the stock, comparing the current price-to-operating income ratio to historical averages, suggesting the stock may be undervalued. A discounted cash flow (DCF) analysis is conducted, projecting potential returns based on different growth rates and market conditions. The summary also contrasts Nike's performance with that of Lululemon, another consumer brand, which is experiencing growth and taking market share, indicating a potential shift in consumer preferences.

10:02

🤔 Personal Opinion on Nike's Stock and Market Position

The final paragraph presents the presenter's personal opinion on Nike's stock. They express uncertainty about the future of consumer brands and their ability to predict long-term market trends, particularly in the apparel industry. The presenter acknowledges that while there is an argument for Nike's stock being attractive and potentially delivering market-beating returns, they do not consider it a buy due to perceived overvaluation and lack of a significant margin of safety. They invite viewer opinions in the comments and conclude the video by encouraging engagement with the channel.

Keywords

💡Earnings Report

An earnings report is a company's official statement of its financial performance over a specific period, typically a quarter or a year. It includes key financial figures such as revenue, expenses, and net income. In the video, Nike's earnings report is mentioned as the catalyst for its stock price drop, indicating the company's financial performance directly impacts investor sentiment and stock valuation.

💡Stock Valuation

Stock valuation refers to the process of determining the worth of a company's shares based on its financial health and market conditions. The video discusses Nike's stock valuation in the context of its declining stock price, comparing it to historical performance and using metrics like price to operating income ratio to assess if the stock is attractively priced.

💡Operating Income

Operating income, also known as operating profit, is the profit a company generates from its regular business activities, excluding any income from non-operating activities such as investments. The video script highlights Nike's operating income as a key metric for evaluating the company's financial health and its stock's valuation.

💡Margin Expansion

Margin expansion refers to the increase in a company's profit margins, which is a sign of operational efficiency and pricing power. The video mentions that despite flat revenue growth, Nike managed to expand its operating income by improving margins, which is a positive sign for the company's profitability.

💡DCF (Discounted Cash Flow)

Discounted Cash Flow is a valuation method used to estimate the value of an investment based on its future cash flows, discounted back to their present value. The video uses a DCF calculation to project Nike's potential stock performance, factoring in expected growth rates and valuation multiples.

💡Revenue Growth

Revenue growth is the increase in a company's income from sales over a specific period. The script discusses Nike's revenue growth, noting a period of stagnation and comparing it to historical patterns, which suggests that the company's performance may be influenced by economic cycles.

💡Market Share

Market share is the portion of the total market demand a company captures with its products or services. The video contrasts Nike's performance with that of Lululemon, suggesting that Lululemon is gaining market share at Nike's expense, indicating competitive dynamics within the industry.

💡Consumer Brand

A consumer brand is a company that markets its products or services to the general public. The video discusses the challenges and unpredictability of investing in consumer brands, as consumer preferences can change rapidly, affecting the company's market position.

💡Price to Operating Income Ratio

The price to operating income ratio is a valuation metric that compares a company's stock price to its operating income. The video uses this ratio to analyze Nike's stock valuation, noting that the stock is trading below its historical average, which could indicate an undervalued stock.

💡Bearish Sentiment

Bearish sentiment refers to a negative outlook on a particular investment, expecting its price to decline. The video suggests that the market is bearish towards Nike stock due to its projected revenue decline and the significant drop in stock price.

💡Competitive Brand

A competitive brand is one that offers similar products or services and competes for the same market share. The script mentions Lululemon as a competitive brand that is outperforming Nike in terms of revenue growth, illustrating the competitive landscape within the consumer brand industry.

Highlights

Nike's stock price has dropped 20% after its earnings report, marking the first time since 2018 it has traded at this price.

The stock has lost 6 years of gains and is down 60% from its all-time high in 2021.

Despite being a well-known brand, Nike's stock has experienced a significant decline.

Nike's long-term revenue growth has been positive but appears to be topping out over the past 18 months.

Historically, Nike's revenue growth correlates with the health of the economy, facing challenges during recessions.

Nike's operating income and EBIT are in a significant correction from their all-time highs.

Cash flow has been more volatile than operating income, leading to a preference for using operating income for valuation.

Apparel revenue for Nike has been flat for about 3 years, with footwear revenue also showing little growth.

Converse and North America revenue have been declining, indicating potential issues in key market segments.

Full fiscal year revenues were only up 1%, with the fourth quarter showing a 2% decline year-over-year.

Operating income for the full year increased by 8% year-over-year, despite flat revenue growth.

Nike's financial outlook predicts a decline in revenue for fiscal 2025, with a significant hit expected in the first quarter.

The market's bearish stance on Nike is evident, with the stock trading significantly below its historical average price-to-operating income ratio.

A discounted cash flow calculation suggests that Nike could deliver market-beating returns if it can grow operating income and maintain a price-to-operating income ratio.

Comparisons to Lululemon indicate that Nike may be losing market share to stronger-performing brands.

The speaker expresses uncertainty in predicting long-term consumer brand trends and market share dynamics.

While there is an argument for Nike's stock being attractive, the speaker does not consider it a buy due to perceived lack of margin of safety.

Transcripts

Nike is down 20% at the time of

recording this video after the company

reported its earnings last night the

first time Nike was trading for this

price was all the way back in 2018 which

means that it has now lost 6 years of

gains Nike was also a $175 stock back in

2021 which means that it is now down 60%

from its all-time highs Nike is one of

the most well-known brands in the world

and it's pretty incredible to see it

stock down so much I have been asked for

my opinion on the stock by dozens of

subscribers so in today's video I want

to explain why Nike stock is down so

much go through its financials and

answer the question of if Nike stock is

looking attractive today so with that

being said let's just hop right into the

video and the first thing that I want to

do is take a look at Nike's long-term

Revenue growth and here we can see that

Nike's Revenue has been growing nicely

for decades and the revenue is currently

sitting right near an alltime high but

it does look like the revenue is not

really growing at least over the past

about 18 months now the Revenue looks

like it is kind of topping out now if we

Zoom all the way out to 1991 we can see

that Nike's Revenue has had periods

before where it isn't really growing the

first period was back here in 1993

second period was in the tech bubble and

then the collapse of the tech bubble and

then in 2008 to about 2010 it looks like

Nike's Revenue was also declining and

not really growing so at least

historically it seems like Nike's

Revenue grows when the economy is doing

well but then when there is a recession

or some pullback in the overall stock

market and maybe consumers are not

feeling feeling as wealthy it looks like

Nike's revenue does see some short-term

headwinds and it could be that we are

entering one of these periods again

because Nike's revenue is clearly

topping out right now now the next

metric that I want to take a look at is

Nike's operating income and we can see

that over the long term it has been

growing but it is in this pretty

significant correction right now from

its all-time highs in 2021 if we take a

look at Nike's eut this is the exact

same story Nike's eat is in a pretty

strong correction as well so then I like

to head over to the C cash flow

statements and if we take a look at

Nike's cash flow we can see that it has

been significantly more volatile than

its operating income so when I take a

look at the stock and when we are going

to be valuing the stock later on in the

video I actually going to be using the

operating income instead of the cash

flow metrics because operating income

does seem to be the most consistent

metric for Nike so now let's head over

to Nike's kpis right here and we can see

that its apparel Revenue has been kind

of flat for about 3 years now apparel

revenue is not really growing for

revenue is also not really growing that

much at least over the past about 18

months it looks like it's kind of been

just hovering Nike's equipment Revenue

has been uptrending though but this is a

smaller portion of the overall business

Converse Revenue has also been declining

since the first quarter of 2023 and it

looks like it's actually declining quite

significantly North America Revenue has

also been topping out since about the

first quarter of 2023 Europe Revenue has

been in a slight Decline and greater

China Revenue has been in a decline

since about the second quarter of 202 21

asia-pacific revenue is still slightly

uptrending though so overall it actually

looks like Nike's business has not been

performing very well its equipment

revenue is really the only Revenue that

has been continuing to uptrend and it's

actually seeing a decline to converse

revenue and North America Revenue has

been topping out which is its largest

market by far as well so then I also

went and took a look through Nike's most

recent financial reporting that I just

reported last night and I have some

screenshots here from the highlights

that I found so for Nike's full fiscal

year revenues were 51.4 billion compared

to 51.2 billion in the prior year only

up 1% fourth quarter revenues were 12.6

billion which were actually down 2%

year-over-year for the fourth quarter

Nike direct revenues for the fourth

quarter were 5.1 billion down 8% and

wholesale revenues for the quarter were

7.1 billion up 5% year-over-year so for

the full year Nike's Revenue only grew

1% and for the fourth quarter it was

actually down 2% year-over-year so on a

year-over-year basis Nike actually saw

its Revenue decline still and this is

what I mean it looks like Nike's Revenue

has been topping out for about 18 months

now and now it looks like it is actually

starting to decline and this is kind of

the trend of Nike's business whenever

consumers seem like they are heading

into a recession again like in 1999 and

in 2008 we saw that Nike's Revenue did

start to decline when recession started

now if we head on to the next screenshot

we can see that for the fourth quarter

North America Revenue was down 1% Europe

Revenue was down 2% greater China

Revenue was up 3% and asia-pacific

revenue was up 1% Converse Revenue was

also down 18% and in total Nike revenues

did decline by 2% Footwear Revenue was

down 4% and apparel Revenue was up 3% so

this is kind of a mixed bag right here

but overall we can see that Nike's

Revenue did decline by 2% in the fourth

quarter year-over-year now let's take a

look at Nike's actual income statement

so right here we can see that Revenue

again was down 2% however operating

income was 1.7 billion for the 3 months

for its last 3 months in its fiscal year

which is up 39% year-over-year for the

full year Nike produced $6.7 billion in

operating income which was up 8%

year-over-year so despite Nike not

really growing its revenue for the full

year of 2024 it did manage to expand its

operating income by 8% through margin

expansion and the operating income again

is at $6.7 billion and keep this number

in mind because we are going to be using

it when we value Nike stock here shortly

but first I want to go through Nike's

Financial Outlook right here so the

business does say that it is in a

comeback and that a comeback at this

scale is going to take time now the

company updated its guidance as well and

for fiscal 2025 they are expecting

Revenue to be down mid single digits

with the first half down high single

digits so they are expecting Revenue to

decline in 2025 now for the first

quarter of its fiscal 2025 year Nike is

expecting its Revenue to be down

approximately 10% year-over-year so Nike

is expecting a pretty significant hit to

its overall revenue and I do think that

this is why the stock is down so much to

today because the business is very

clearly saying that it is facing

significant headwinds right now and its

revenue is actually projected to decline

in 2025 which is not a great thing to

see so now if we head back over to stock

unlock we can see that Nike is a

117.5 billion doll company today and

again remember the company did produce

$6.7 billion in trilling 12 months

operating income now which ultimately

means that Nike is selling for a price

to operating income of about

is go and take a look at Nike's

historical average price to operating

income ratio to see if it is trading

below its averages right now and here we

can see that over the past decade Nike's

average price to operating income has

been about 27.6 so it is actually

trading significantly below it's

historical average price to operating

income in fact back here in the stock

market crash of 2020 Nike's price to

operating income was 21.1 which means

that the business's pric to operating

income today is about 20% below where it

was trading during the stock market

crash of 2020 so it seems like the

market is very bearish towards Nike

stock right now and relative to

operating income you can make a strong

argument that this stock is looking

cheap right now however Nike's business

seems like it is facing some serious

headwinds with first quarter Revenue in

2025 projected to decline double digits

by 10% year-over-year now also back here

in 2020 and really at the start of 2021

Nike's business was trading for roughly

60 times operating income and even right

here at the end of 2021 it was trading

for 38 times operating income now I have

said this before on my channel and

during 2021 and really even up until

recently Nike's business in my opinion

was pretty significantly overvalued I

don't think that Nike stock was ever

actually truly worth

$175 so if you are taking a look at the

60% correction that Nike stock is in

right now from its all-time highs you

just have to remember and be aware that

Nike stock was actually never even worth

$175 I do think that the market was

overhyping the stock and overvaluing the

stock at one point and now the market

today is finally maybe undervaluing

Nike's stock at least if you take a look

at how the market has historically

valued the stock on its operating income

but I don't see any reason why Nike

stock should have trade it for 38 times

operating income and I do think that the

stock historically was quite overvalued

so next what I would like to do is a

discounted cash flow calculation on Nike

stock today and we are going to be using

its operating income metric now over the

past 5 years Nike has compounded its

operating income at about 4.6% annually

and bought back about 1% of its shares

annually as well it also grew its

dividend by 11% annually and it did

trade for a 33 price to operating income

on average over the past 5 years

specifically but remember the stock was

also quite significantly overvalued in

2020 and in 2021 so this number is being

inflated at least in my own opinion so I

entered in a 20 price to operating

income which I do think is much more

fair for the this business and it does

mean a slight multiple expansion over

the next 5 years because again the stock

is trading for about 17 times operating

income today so basically if Nike can

actually continue to grow its operating

income by 4.6% annually over the next 5

years buy back 1% of its shares grow its

dividend by 11% and trade for that 20

priced to operating income then the

stock could deliver a compounded annual

return of about 11% from its share price

today which is a market beating return

however you do have to remember that

this DCF right here does factor in

roughly 4.6% annual operating income

growth and Nike is projecting 10%

Revenue declines in the first quarter of

2025 and about a 5% decline to revenue

in 2025 as well so if we knock this

number down slightly to about 3% to make

it a little bit more conservative and we

also see that the dividend May grow by

about 5% annually and the stock will

maintain that 20 priced operating income

then the stock could deliver a

compounded annual growth rate of about

99.3% annually going forward which is

still a decent return but it's not

really a market beating return so

basically what it looks like in my

opinion is Nike kind of has to maintain

that higher price to operating income

ratio and still manage to grow its

operating income overall by at least

slight single digits going forward to

actually be worth fair value today and

produce at least Market beating returns

or returns in line with the market over

the next 5 years now personally I have

no idea if Nike is going to be able able

to do this it seems like its brand is

really seeing a headwind right now and

some struggles what's also interesting

is another stock that I follow here on

my channel which is Lululemon is

actually seeing its Revenue still grow

by 16% year-over-year and is projecting

about 10% growth for the next year in

its fiscal year so it seems like

Lululemon which is another consumer

brand is actually taking market share

from Nike because that business is still

growing quite strong and at Double Digit

growth rates and what's also interesting

is Lululemon is trading for a price

operating income of about 18.5 today so

after Nike's most recent share price

fall it is slightly more expensive than

Nike but Lululemon at least in this

market environment seems like it is

actually the stronger business and it is

growing significantly quicker than Nike

and actually still projecting growth so

if I was interested in an heral company

right now or a consumer brand I think

that I would be much more interested in

Lulu Lemon because that stock is

basically the same price in terms of

operating income but it is projecting

significantly more growth it's not

actually projecting decline to its

business but in general I do not invest

in the consumer Brand's industry because

I just do not understand the Moes in

this industry like I don't understand

why someone is going to buy Nike versus

Lululemon 10 years out into the future

or is there going to be some new

consumer brand that comes up and then

everyone wants to buy that brand is Nike

going to screw up its consumer brand

image are people not going to want to

buy it in 5 years is Lululemon going to

continue taking market share and then is

some other business going to come up and

take market share from lul L lemon due

to Consumer trends like I just don't

know I don't know how to predict

consumer Trends over the long term so

all of these businesses in my opinion

and based on my own investing um they're

not biased for me because I cannot

identify the Moes and I don't know what

the Moes are Behind These businesses

like again Nike is supposed to be one of

the strongest brands in the world and at

least right now it seems like it is

getting beaten by smaller Brands like

Lululemon and it seems like it is

actually losing some market share and

that's not something that I would have

been able to predict and it's actually

kind of surprising to me so again these

are out of my circle of competence I

don't know how to predict the long-term

trends of the apparel industry and these

consumer Brands so for me I stay away

from all of them however with that being

said there is an argument that Nike

stock is looking quite attractive today

and could deliver Market beating returns

if the company can turn around the

business get that operating income

growing again and if it can maintain at

least a 20 price to operating income

ratio so that's my opinion on the stock

today it's not a buy for me I do still

think that it is a little bit more on

the expensive end I don't think that it

is offering a massive margin of safety

today but that is just my opinion and I

would love to hear what you guys think

down in the comments section below and

that is going to wrap up the video for

today everyone so if you did enjoy this

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that's going to wrap up the video for

today everyone so thank you so much for

watching as always I truly do appreciate

it and I really hope to see you all

again in my next one