Is the stock a buy now after earnings?

At a time when many companies are citing headwinds in consumer spending or difficult macroeconomic conditions, On Holding (ONON -1.70%) stood out as an exception. Shares of the high-performance footwear and sportswear maker are up nearly 60% this year on strong operating trends and financial results.

There’s a lot for investors to apply here, but does this rally in On Holding shares have the legs to continue? Here’s what you need to know.

A recap of Q2 2024 earnings from On Holding

It’s been an impressive start to the year for On Holding as it continues a global expansion strategy. In the second quarter, the company posted net sales growth of 29.4% over the prior quarter on a constant currency basis, with strength between its direct-to-consumer and wholesale channels.

The company is capturing strong brand momentum across all regions. Even though Asia-Pacific still only accounts for 10% of the total business, Q2 sales rose 84.7% year-on-year in constant currency, highlighting a breakthrough in customer awareness in markets such as China and Japan. Sales growth of 24.6% in the Americas region was also solid.

During the earnings conference call, management noted that current demand is outstripping supply globally — which is a good problem for most companies. On Holding translates this dynamic into premium pricing and higher profitability. A combination of growing volumes and growing operational scale drove adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in the second quarter to 16% from 14.1% last year.

On Holding reiterates its full-year guidance for “net sales growth of at least 30% on a constant currency basis,” with some optimism for a positive outlook. Despite the exceptional results in the second quarter, some short-term inventory constraints are seen as the only limitation to an even stronger forecast.

Image source: Getty Images.

The early stages of a significant opportunity

Attracting On Holding as an investment begins with the feeling that the company is in the early stages of a long-term transformation into a globally recognized fitness and lifestyle brand. Whether it’s a reputation for quality products or differentiated design, it’s clear that On Holding connects with consumers.

The company is on track to generate about $2.7 billion in sales this year, a significant number but still small compared to its competitor’s $51 billion in sales. NIKE or even 10 billion dollars Lululemon Athletica in the last year as a reference point. It’s telling that On Holding’s recent success has come at a time when both Nike and Lululemon are struggling to revive growth.

On Holding’s potential to capture an ever-increasing portion of the global footwear and apparel market is a major runway for the company.

Note that several categories for On Holding are largely untapped. Currently, shoe sales make up 96% of the business, with clothing and accessories still small. The company’s ability to reach new customers in new markets and also offer a wider variety of products supports some confidence in the growth opportunity.

In terms of valuation, On Holding shares trade at 43 times Wall Street’s average 2024 earnings per share (EPS) estimate of $1.01 as a forward price-to-earnings (P/E) ratio.

While that level represents a premium compared to peers like Nike at 26 times earnings or even Lululemon at 18, there’s a case to be made that the spread is justified given On Holding’s stronger earnings momentum. Looking to 2025 and beyond, the company has plenty of room to grow in its valuation as a tailwind for the stock.

ONON PE Ratio data (before) by YCharts.

I remain bullish on On Holding shares

On Holding’s latest results have helped reaffirm the bullish case for action. As long as macroeconomic conditions remain, I think there’s a good chance On Holding shares will continue to rise.

Points to watch over the next few quarters include trending profit margins and sales growth by region. For investors with a long-term time horizon, On Holding shares can work as part of a diversified portfolio.