Shareholders of Nike would probably like to forget the past six months even happened. The stock dropped 24.5% and now trades at $43.27. This may have investors wondering how to approach the situation.
Is now the time to buy Nike, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Nike Will Underperform?
Even though the stock has become cheaper, we don’t have much confidence in Nike. Here are three reasons why there are better opportunities than NKE, plus one stock we’d rather own.
1. Declining Constant Currency Revenue, Demand Takes a Hit
We can better understand Consumer Discretionary - Footwear companies by analyzing their constant currency revenue. This metric excludes currency movements, which are outside of Nike’s control and are not indicative of underlying demand.
Over the last two years, Nike’s constant currency revenue averaged 4.8% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Nike might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Projected Free Cash Flow Gains to Pump Profits
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Nike’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 2.3% for the last 12 months will increase to 4.6%, giving it options for capital deployment (investments, share buybacks, etc.).
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Unfortunately, Nike’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Nike, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 27.7× forward P/E (or $43.27 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d suggest looking at the most entrenched endpoint security platform on the market.
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