3 Reasons Why Nike Stock Can Be a Great Long-Term Buy

NIKE (NKE 0.07%) is a leading clothing company and its iconic brand is known around the world. Even though its products are often more expensive than others, the company has been able to grow its business significantly over the years. Today, its market capitalization is around $130 billion.

But lately, investors have become concerned about the company’s growth prospects. Business has slowed and inflation isn’t helping. While short-term headwinds may drag it down this year (it’s already down 22%), that’s why I think the stock can still be a long-term winner.

It has strong brand recognition among teenagers

Even if you’re not a Nike customer and think its products are too expensive, the data suggests there’s still plenty of interest from young people. The company’s brand ranks high among teenagers, according to a report this year from Piper Sandler.

The report found that Nike was by far the favorite among teenagers surveyed in a recent semi-annual survey for both clothing and footwear. What is particularly noteworthy is that the difference between the first and second is considerable. In terms of footwear, Nike was the most popular brand with 59% of teenagers, with the next closest brands having a mind share of just 7%. In terms of apparel, it was a bit closer, with Nike coming in at 34% compared to 6% for the second most popular brand.

While the company’s growth rate may be showing signs of weakness, the brand remains strong, suggesting that it may just be poor economic conditions that are weighing on the business, as opposed to problems with Nike’s overall brand.

Its low earnings multiple can set investors up for gains down the road

Another reason to consider buying the stock is that it looks very cheap right now. At just 22 times its trailing earnings, Nike trades at a much lower multiple than it has in the past and is well below its 10-year average.

NKE PE report data by YCharts.

The counterpoint, of course, is that growth investors won’t want to pay a premium for a business that’s struggling to grow. In its most recent earnings report, covering results through the end of May, Nike’s quarterly revenue totaled $12.6 billion — down 2 percent year over year. This is not the type of stock that investors will want to pay 30 times earnings for right now.

But at the current multiple, the stock might be cheap enough to make sense to invest anyway. Average stock on S&P 500 it trades at nearly 25 times its trailing earnings. And while Nike’s growth rate may be negative today, that doesn’t mean it will stay that way. As economic conditions improve and as the company launches new products, the growth rate could increase.

Nike’s profit margin is solid

What’s promising is that even amid the current market adversity, Nike’s profit margins remain strong at nearly 12% of revenue.

NKE Profit Margin Data (Quarterly) by YCharts.

This is important for two reasons. The first is that a high profit margin can give the company room to offer discounts and lower prices to stimulate some growth, while ensuring that it remains profitable in doing so. Second, a double-digit profit margin means that once the growth rate starts to pick up, much of that incremental revenue will result in stronger earnings numbers, which in turn will potentially reduce multiples of Nike’s earnings and will make the apparel stock. a better buy in the process.

If you’re patient, this can be a great buy-and-hold stock

In the past, Nike stock has not struck me as a good buy because of its high valuation. But now, at a much more sustainable price, the stock can represent a potentially solid investment for those willing to be patient and hold out for the long haul.

There may not be a quick turnaround for Nike’s business, and much will inevitably depend on the strength of the economy, but I’m confident it can return to growing sales. When that happens, his win numbers will improve and he could look like a bargain buy.