Nike (NYSE: NKE) has dominated the sportswear industry for more than a generation, but the sneaker king looks surprisingly vulnerable these days.
Revenue growth has ground to a halt, and the company is backing away from its direct-to-consumer strategy, admitting that it made a mistake in turning away from its wholesale relationships with retailers like Foot Locker.
Indeed, its revenue has been contracting — it was down 2% in its fiscal fourth quarter, which ended on May 31, and the stock has plunged, now down more than 50% from its peak in 2021. But is Nike’s stock poised for a turnaround or will it head even lower?
Let’s take a look at the arguments to buy, sell, or hold Nike stock to determine which is the best move today.
The case for buying Nike stock
At this point, it’s difficult to make an argument for buying Nike stock based on the numbers alone. Revenue fell 2% in the most recent quarter, and the company expects more tough times in its fiscal 2025, calling for revenue to decline by a mid-single-digit percentage.
Nike has blamed some of those problems on weak demand for consumer discretionary goods, and there’s some truth to that. However, rivals like On Holding and Deckers’ Hoka are rapidly taking market share from Nike and filling the void it left in the wholesale channel.
Nike has faced challenges before, and it has successfully rebounded. In the mid-2010s, it was losing ground to Adidas, but a new strategy focused on bringing new products to market faster helped the company return to solid growth.
Nike seems to be looking for a turnaround strategy these days, but investors could reap a nice reward for taking a risk on the stock at its current valuation. Nike trades now at a price-to-earnings ratio of 21, but the company has the potential to significantly improve its earnings if the business starts improving.
Buying the stock right today might require a leap of faith, but if Nike’s business starts to improve, the stock has a lot of room to run.
The case for selling Nike stock
In addition to the weak numbers, there are other reasons to sell Nike stock. First, its declining revenue wasn’t a freak accident. It was a consequence of poor strategic planning and a leadership team that now seems to be on the hot seat, though co-founder and top shareholder Phil Knight has expressed support for CEO John Donahoe.
The strategy of trying to modernize the business around the direct-to-consumer channel and shift from brand marketing to performance marketing seems to have backfired. Meanwhile, the company has also underinvested in its products and is arguably losing its brand relevance.
With or without a new leadership team, those problems will be difficult to unwind, and Nike could undertake a multiyear turnaround effort that may not pay off.
Rather than waiting to see what happens or hanging around for another guidance cut, investors may be better served by dumping the stock and investing elsewhere.
The case for holding Nike stock
Right now, the best way to approach Nike seems to be with patience. It seems like a mistake to sell a stock that has been such a big winner over its history, has significant brand advantages, and has an unmatched roster of athletes as endorsers.
Billionaire investors also seem to notice the discount at which it’s trading. For example, Bill Ackman‘s Pershing Square fund purchased Nike stock in the second quarter, most likely to take advantage of its discounted valuation.
With the stock price having fallen so far, riding out the volatility could be the best move for current Nike investors.
What’s the right choice?
Right now, holding Nike stock seems to make the most sense. There’s no question that the business is facing challenges, but Nike has the brand strength to rebound, recapture its valuable wholesale relationships, and reinvent itself.
It may take a while for a turnaround to materialize, but the stock has fallen far enough that there will be substantial upside if Nike can return to its historical growth rate.
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Jeremy Bowman has positions in Nike. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends Foot Locker and On Holding. The Motley Fool has a disclosure policy.
Nike Stock: Buy, Sell, or Hold? was originally published by The Motley Fool
