Best Stock to Buy Right Now: Nike Vs. On Holding

The world of athletic footwear and apparel is witnessing a sea change, or so it would seem. The long dominance of NIKE (NKE -1.41%) and sneakers is challenged by smaller, specialty brands such as On Holding (ONON -0.18%) and Deckers Brands‘Hoka.

Sure, Nike still has the biggest slice of the pie, but its grip is slipping and its share price has taken a beating for it. Nike shares have fallen 24 percent so far in 2024, falling nearly 20 percent in a single day after its fiscal fourth-quarter 2024 earnings were released in June.

Holding, on the other hand, has seen its share price rise this year, up nearly 70% since markets opened in January. The two companies appear to be on different trajectories, at least at first glance, so which is the better stock?

Nike is trying to make some big changes

Nike CFO Matthew Friend sought to allay fears in its latest earnings report for the period ended May 31, saying the company is “taking steps to reposition NIKE to be more competitive and drive sustainable growth and profitable in the long run”. It is needed. Nike’s revenue growth has been anemic for several years, even reversing in the last quarter. Take a look at the chart below showing the growth curve. Not the shape investors like to see.

NKE Revenue (TTM) data by YCharts

What is done then? The company is cutting costs by instituting major layoffs this year, cutting about 2 percent of its global workforce. Up to 40% of those came from his management, including 32 vice presidents and 112 senior executives. That may be short-term good news for the company’s bottom line — operating expenses fell 15% year-over-year for the quarter — but I fear what cutting a significant portion of top staff does to Nike’s ability to succeed. .

On the other side of the balance sheet, Nike is focusing on pricing, hoping to gain ground by shunning the premium image it tried to shore up by starting with a line of shoes under $100. This will likely help it with a broad price-conscious demographic. Of course, this will likely come at the cost of eroding profit margins, making the net benefit unclear.

So what happened? How did Nike get here? There are countless reasons, but one of the biggest blunders is the move to a direct-to-consumer (DTC) model. Nike has been pushing DTC for years. DTC takes wholesalers and retailers out of the equation. Consumers buy directly from Nike either in its own stores or on its website. It makes a lot of sense in theory – it would help the company have more control over branding and pricing, and could increase margins.

It didn’t go so well in practice. First, there is a major cost to operating your own retail spaces and building logistics and fulfillment infrastructure that wasn’t needed before. Critically, however, the company has voluntarily given up shelf space in major retailers, where many consumers still shop. And unfortunately for Nike, it opened the door for brands like On and Hoka to fill that empty shelf space. Nike Direct’s global revenue grew just 1% in 2024, actually falling in North America.

On Holding is gaining ground quickly

Things are looking much better now at On. The company’s revenue growth is flat out at nearly 30% year-over-year for the second quarter of 2024. Just look at this growth curve compared to Nike’s earlier.

NKE Revenue (TTM) data by YCharts

On’s growth is driven by a strong, premium, performance-focused brand. The company’s shoes are unmistakable – whether you can see a logo or not – thanks to its distinctive soles built with proprietary technology. It has moved beyond footwear and into apparel, broadening its consumer base while maintaining its high-end performance and image, and recently made a very successful push into Asian markets.

That growth is certainly impressive, but last quarter’s $568 million in revenue is a far cry from Nike’s $12.6 billion. The company has a long way to go before it can truly rival Nike, and this gives the footwear giant time to adjust and regain market share, or at least stem the tide.

So which is the better stock? On or Nike?

This one is tough. Here’s why: On is in a much better position than Nike right now. Nike is trying to right the ship, but I’m not impressed with what I’ve seen so far. I think Nike could continue to slide before any major reversal occurs, while On is clearly on an upward path. The problem is valuation. On has a price-to-earnings (P/E) ratio of 83.4 right now. It is extremely large. It’s about 4 times bigger than Nike. It is even more than Nvidiais at its peak this summer.

This is the thing that prevents me from recommending the On wholesale stock. That said, it’s still the best stock right now, I think, just with a major asterisk attached.