After making new highs in 2020, Nike (NYSE:NKE) stock has held steady since the start of the year. With much of its 2020 success due to novel coronavirus-related tailwinds, some may write it off as simply a “pandemic play.” But, viewing it through that way isn’t giving the company enough credit.
Yes, last year’s virus-related lockdowns — and the “stay-at-home economy” that went along with it — wound up being an unexpected boon for the global apparel company. But, unlike some other names’ 2020 results were largely a one-time event, the strengths backing up Nike aren’t going away when the pandemic finally does.
That is to say, this company has numerous long-term strengths. And with strong brand loyalty, its drive to innovate and its pivot to a direct-to-customer (DTC) business model, this remains one of the highest quality names out there.
The current valuation may appear to more than reflect this. Yet, the stock’s far from topping out. Therefore, expect this to remain a winner over the long-term.
NKE Stock and Its Underlying Strengths
Nike has three key strengths that make it one of the best apparel stocks to own. First is brand loyalty. Investing heavily in its brand for decades, not just through advertising, but via its 100 million-plus member rewards program as well, the company has successfully built a community around its brand.
Additionally, this brand loyalty plays a role in its second main strength: innovation. This continued drive to bring out the latest and the greatest in footwear and other athletic apparel has been in it being the most valuable apparel brand for seven years running.
These two strengths alone bode well for the company in the long run. But, that’s not all! There’s a third strength, that will play a role in its continued above-average performance. That’s its gradual move towards a DTC business model. In the past decade, DTC sales have gone from 16% of total revenue to 35%. Not only that, during the same time-frame, the company’s revenue has pulled away from the rest of the competition. Increased sales isn’t the only reward from pivoting towards DTC. Cutting out the middleman, it’s been able to improve its margins as well.
Admittedly, investors are well aware of this company, its numerous strengths, and its tremendous economic moat. That’s why NKE stock today commands a premium valuation. But, don’t let this scare you off this opportunity. Valuation may be rich, but that won’t stop shares from continuing to generate strong returns in the coming years.
Even With a Premium Valuation, Plenty of Room To Run
At its current price, Nike shares sport a forward price-to-earnings (P/E) ratio of 34.5x. In other words, Wall Street is fully aware of this company’s recent success and strong prospects. This premium valuation is far above the forward multiples of its publicly-traded peers. Some may see this as a sign that shares have gotten overheated in the past year, and that it’ll hold steady going forward until it grows into its valuation.
Yet, don’t assume that’s going to be the case here with NKE stock. Its premium valuation is more than justified. And with its projected growth in the coming years, the stock has plenty more room to run. With the post-virus “reopening” possibly sustaining high demand for athletic apparel, sales are set to grow by double-digits again in 2022. And, with the continued pivot towards DTC, this will produce even higher levels of earnings growth.
Average sell-side estimates call for $3.14 per share in earnings for 2021. But, for next year, earnings are set to rise around 25%, to $3.95 per share. And, that’s just assuming it only hits the average of estimates. Just meeting expectations could fuel a continued surge back to its recent all-time high ($147.95 per share). If earnings come in well ahead of analyst projections? Shares could continue to climb, reaching prices well above the $150 per share price level.
Putting it simply, as it continues to grow at an above-average clip, this stock stands to continue generating above-average returns for investors.
As Shares Hold Steady, Now’s the Time To Buy
Those who bought in at last year’s lows saw tremendous gains seizing the opportunity with Nike shares. But, after sentiments has flipped back to positive, should you buy now? Or, wait for a less pricey entry point? I wouldn’t sit and wait for another pullback.
This is a name to buy and hold for the long-haul. Last year’s boost in demand may have been a once-in-a-lifetime event. But, it hardly signifies the end of this being a great investment opportunity.
With the high loyalty for its brand, its focus on innovation, and its success moving towards a direct-to-customer business model, things have far from peaked with NKE stock. And as shares hold steady at around $134 per share, now is the time to buy.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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