Nike Stock Smells More Like a Buy Than Old Shoes...

Duration: 6:51 1034 transcript words EN summary

Video summary

The speaker argues that Nike stock appears to be nearing a bottom, presenting an attractive investment opportunity as the company transitions from a high-growth equity to a cash-flow-focused business. Historically, the market's excitement drove Nike's P/E ratio from under 20 to a peak of 40 during its growth phase, but recent struggles with earnings have caused the valuation to contract significantly into the high teens. The analyst notes that while the current P/E ratio might seem low for a pure cash-flow stock, it remains elevated at around 20 because the market still anticipates a potential return to growth. If Nike can restore its net income from the current 3 billion to 5 billion, investors could see nearly a 100% return on their investment, supplemented by a dividend yield of approximately 4%. A critical factor in this analysis is the company's strategic shift back to its core sports identity with the "Win Now" strategy, which aims to reverse recent declines in revenue and profitability. The speaker highlights that while previous attempts at innovation did not yield immediate results, the current focus on sports seems to be stabilizing the business. Furthermore, the valuation provides a significant margin of safety; with an enterprise value around 70 billion, there is a theoretical possibility of a takeover offer from a competitor, such as a Chinese company, or even interest from entities like Berkshire Hathaway if the stock price drops further to 50 billion. This potential for a strategic acquisition adds another layer of upside beyond simple earnings recovery. The investor base has also undergone a notable transformation, shifting from aggressive growth-oriented traders who capitulated at lower prices to value investors seeking safety and dividends. The speaker personally requires a cash flow yield of at least 8% to consider buying Nike, noting that the current 5% yield is slightly below this threshold but still represents a compelling entry point given the risk-reward profile. Although there is always a possibility for the stock to decline further, the combination of a depressed valuation, a strong brand capable of generating substantial cash flows, and the potential for a takeover makes the current price level seem like a very good bet. Ultimately, the video concludes that while future performance depends on the success of the 2027 strategy, the current market conditions suggest Nike is close to bottoming out and offers a favorable risk-adjusted return for patient investors.

Read the full video transcript

Good day, fellow investors. To me, it smells like Nike is about to bottom out. There were several comments, even in Croatian, Nike, Nike, Nike, Nike. Let's take another look at the situation. I've done a few videos over Nike, explained the risk and reward. At 60, I told you, "Okay, you can start, but be ready to buy more on the lower side." Now, we are definitely at the buy more strategic approach to Nike. But, I also said I'm not betting on these things. Let's recheck now, 30% lower. It was a strong buy for Bill Ackman. He then sold, closed the position at a loss. Also, I discussed this 6 years ago. I said, "Nike is flying too high. It will look ugly." I was completely right. This video was made in June 2020. The stock price then was 99. I had to endure bad comments for a year or something till the peak of 12 November 20 21. But, eventually, I was completely right. And the key situation now is Nike went from a growth stock to a cash flow stock, and valuation still incorporating some growth. And now, you have to see the strategy you might want to take for Nike stock. Because, if you look at earnings growth, growth, growth, growth, growth, all great. And then, in the last few years, all very ugly. And then, if you look at the situation there, Nike started at the P ratio in the below 20, where we are now. But, the growth, it started growing. As a business grows, everybody gets excited. You can see the P ratio going to 30. Then, it gets more excited. And then, we reach the peak at 40. The stock price at highest. Earnings have been just growing. Everything looks great. And then as earnings start struggling, the P/E ratio goes down to the 20s. Then it goes lower, lower, lower, and now we are in the high teens. But this explains the growth stock and the cash flow ugly stock and also the up and down with the stock. But we have to see where we are now. But the P/E ratio is not 12 for a pure cash flow stock. The P/E ratio is still 20. Why? Because this is still Nike. And the key question for investing is, will Nike return to growth? If it returns to growth, if the 3 billion net income now goes to 5 5 * 20, that's 100 billion. The market cap now is 60 billion. That's almost 100% return for you. Plus, you get a good dividend. 4% is already something. I looked a little bit at the numbers. Flat on a reported basis, down 2% on a currency neutral basis. Earnings are still struggling. They're still working on it. But there is a lot of revenue. The 6 billion net income is gone down to 3 billion. And now everything depends on 2027 win now strategy. I've been following Nike for 7-8 years. It was I remember looking at the conference call it had mentioned Air 50 times. Then that worked, but then they went for innovation. That didn't work. They have to change sell, which we are seeing the result now. And now they have back to sports, back to everything win now strategy. Will it work? Who knows? But it is a bet on growth, cash flows. Not really a bet at the P/E ratio of 20. That's a dividend yield of 4 or 5% you see that buybacks have been lowered and this is already not bad for Nike. Then we can look at another question to answer the is Nike bottoming out. Nike at 60 billion enterprise value when I add the debt minus the cash we are 65 billion but let's say 70 billion. 70 billion for a brand like this. Is there anyone out there that could buy it for 70 billion and then make 6 7 billion per year out of that? Likely and you own this huge brand. A Chinese company, you never know. So I think that if Nike goes down more to 50 they can be a takeover offer for 70 for sure. Thus we are close to bottoming out at the margin of safety. Perhaps even Berkshire might buy it. My verdict now is it smells like a good bet. I said it that at 60 but now it's really better. Buy more at 40 we are there. Will it go to 30 20? Unlikely. Especially what I learned from Michael Berry you look at volume and look at the volume in the last few years. This means that the shareholder base for Nike has changed. These guys were growth guys they were capitulating here and these guys are value investors buying value. Me personally I would need that cash flow to be at least at 8% to buy Nike. We are now at 5% so a little bit lower. That means all the the stock in the high 20s very unlikely but you never know. For now you have it here because that would also mean a market cap of 3 billion times 12 is 36 but if for whatever reason we go to 4 billion in net income, free cash flow times 12 50. The market crashes for whatever reason, we might be there with Nike. It all depends on 2027 news, but now it looks like complete capitulation on one side, margin of safety from a takeover on the other side. Can it go lower? Always, but always keep in mind that strategy and for me it I'm just saying it starts smelling like a very very good bet. So, we have Nike here as cash flow 5% return. Let me put it here in the bets and put it let's say with green frame that it is a very very good bet. Then I'll adjust things, but for now let's put it here in the quadrant and then see where it goes. So, interesting situation, let's follow it over time. Thanks for watching. You can check my portfolio on my research platform. I'll see you in the next video.