Is it too late to buy in stock?

Since then On Holding (ONON -0.46%) went public through an initial public offering (IPO) in late 2021, investors wondered if the athletic footwear company could become the next NIKE. Well, recently, it has turned out much better for investors.

While Nike shares are down more than 20% so far in 2024, On Holding shares are up 65%. That’s because the company’s sales continue to skyrocket. Net sales rose more than 55% on a constant currency basis in 2023, and the company expects sales growth of at least 30% on that basis for 2024. Investors bid up the stock as those sales also reach to the bottom line, with earnings per share and the company’s cash balance rising in the first half of 2024.

Tapping into a growing US market

Although On Holding is a Swiss company based in Europe, two-thirds of On’s sales come from North and South America. Sales in that region continue to grow at a rapid pace, and there is good reason for investors to believe that the trajectory for those sales may continue to accelerate.

Sales of athletic footwear in the US are expected to grow steadily over the next few years. And, importantly for shareholders, On retains more of these sales as underlying profit as well.

The company has consistently reported increases in its EBITDA margin (earnings before interest, taxes, depreciation and amortization). This measure of profitability increased along with the net income margin as On reduced operating expenses. Specifically, the EBITDA margin increased from 13.5% in 2022 to 15.5% in 2023, and the company expects at least 16% in 2024. In addition to lower shipping costs, On made its sales direct to consumers (DTC) to be higher. part of the business, contributing to profitability.

A market beyond shoes

On has also expanded its product offering beyond running shoes and even beyond footwear. This is a smart move for the fast growing company. Apparel sales contributed to the sales growth, with a 63% increase in the second quarter. And that, too, is a growing market. Global activewear sales have been strong throughout the decade and are expected to grow another 33% through 2028.

A look at the rating

But those growing addressable markets have already attracted some investors. After the stock rose another 15% in just the past two weeks, it’s trading at a relatively high valuation.

The stock is valued at a price-to-sales (P/S) ratio of more than 5, based on the company’s 2024 sales estimate – the highest level in the past year. And while the price-to-earnings (P/E) ratio has long been high, representing the company’s strong growth, it’s also well above last year’s average of about 44. But sales continue to grow rapidly and more falling to the bottom line as a profit, On Holding is still a compelling growth stock.

It’s not too late to buy On Holding shares, but investors may want to build a position gradually. With the stock at the upper end of its historical valuation, buying in thirds can take advantage of any dips that will inevitably come.