Where will Nike stock be in 5 years?

If you bought shares of NIKE (NKE 0.20%) five years ago, you would have lost 5%, including the positive impact of dividends. This is an extremely disappointing return from an industry leader.

For the sake of comparison, an investment in S&P 500 the index would have almost doubled your capital. But perhaps the pessimism surrounding Nike has reached a low point and things will turn around for the better.

Where will this be? consumer discretionary stock be in five years?

Trying to right the ship

The disappointing performance of Nike stock is not without reason. This company has faced problems. In the fourth quarter of fiscal 2024 (ended May 31), Nike reported a surprise sales decline of 2 percent. And for the current fiscal year, the outlook suggests revenue will fall into the mid-single digits. Numerous factors such as weakness in China, weaker sales of key product lines and macro uncertainty, deserves the blame.

Nike’s latest struggles show just how difficult it is to consistently dominate the apparel and footwear industry. Competition is incredibly fierce as there are virtually no barriers to entry preventing new firms from entering the market. Nike is under constant threat from rivals.

To make things even more challenging is the ongoing need to not only predict what styles and designs consumers will gravitate towards, but also to successfully cater to those tastes. Nike deserves credit for being at the top of the industry for so long. However, the company’s recent weakness indicates that it must always put product innovation at the heart of how it operates.

Moreover, Nike needs to find the right balance when it comes to distribution strategy. In the depths of the pandemic, when physical shopping was restricted, it made sense to lean heavily on digital capabilities. But now that consumer shopping behavior has normalized, Nike needs to establish relationships with retail partners.

Taking a contrarian approach

No business is perfect. And even the best companies have times when they struggle. Nike is definitely trying to find solutions to its problems.

Its current valuation could give investors a rare opportunity to buy into a struggling industry when the narrative couldn’t be bleaker. The stock trades at a price-to-earnings ratio of 19.6. It is close to the lowest rating in 10 years.

There may not be a better time to pick up this stock in recent memory. However, that’s only if you believe management can right the ship with a return to healthy revenues and earnings growth. I would like to give the executives the benefit of the doubt.

Nike is not a bad company. Own one of the the strongest brands the world has ever seen. That counts for something. And it should carry weight in the minds of consumers today and in the future. Decades of impressive marketing tactics and endorsements of high-level athletes have certainly paid off.

Nike’s growth has stagnated. Consensus analyst estimates call for sales to decline this year compared to fiscal 2024. But over the past decade, revenue has grown at a compound annual rate of 6.3%. I don’t think it’s a stretch to believe that Nike can get back to posting this kind of earnings, provided management is focused on product innovation.

It helps that Nike is committed to a favorable capital allocation plan backed by steady free cash flow production. The company has raised its dividend for 22 consecutive years, paying out $2.2 billion in fiscal 2024. Nike also spent $4.3 billion on share buybacks in the past 12 months, a smart move given the attractive valuation of the shares.

Given the extreme level of pessimism surrounding this business, patient investors who believe in Nike are poised to be rewarded over the next five years.