3 things to know about Nike stock before you buy

Over the past two decades, he has invested in stocks of NIKE (NKE -0.25%) would have resulted in an impressive total return of 11 times. That goes beyond S&P 500his performance at the same time.

However, the sportswear giant is currently in the midst of a rough patch. The stock is down 55% from its all-time high.

Given its outstanding long-term performance, investors should at least take the time to learn these three things about the business. Maybe this consumer discretionary stock is a buy-the-dip candidate.

Nike is facing a difficult time

Although Nike has been able to consistently grow its sales historically, it is going through a tough time right now. This definitely has a negative impact on the share price.

The company generated revenue of $12.6 billion in the fourth quarter of fiscal 2024 (ended May 31), down 2% year over year. Executives see sales declining by single digits in the current fiscal year. That’s exactly what investors don’t want to see, especially as rivals like it Lululemon Athletica and On Holding post much better growth.

Nike hasn’t been at the top of its game when it comes to product development and keeping customers engaged. On the most recent earnings call, CEO John Donahoe said the business is fully focused on getting stronger in these areas.

It also doesn’t help that the company is still struggling to find the right distribution balance between selling apparel and footwear through third-party retail partners and through its own website and stores. During the pandemic, Nike focused on the digital and direct-to-consumer channel. But now, he wants to restore relationships with wholesale accounts.

Nike’s key competitive strength

Nike struggled with product innovation and figuring out its distribution strategy. But one area where it has long excelled is its marketing. The business is known for its remarkable story, which translates into effective advertising campaigns that connect with people across the globe. This expertise has been built up over decades and is supported by the endorsement of high-level athletes.

Because of this core competency in marketing and advertising, Nike has developed a strong brand presencewhich supports its broad economic moat. For the most part, clothing and shoes are really just basic product offerings. But throwing a Nike Swoosh on them was profitable, as was the deal gross margin it has averaged a superb 44.6% over the past 20 years.

It is extremely difficult to find lasting success in the fashion industry. The fact that Nike has remained relevant for so long is a clear indicator of how well it has managed to resonate with its consumers. This should give investors confidence that the company will maintain this relevance in the future.

Nike stock valuation

To say that Nike stock has disappointed in recent years might be an understatement. They are trading at 55% of their November 2021 peak. And over the past five years, investing in this business would have resulted in an investor adding just 1% to their startup capital. This is a terrible track record that could immediately turn off investors, especially as S&P 500 it would have doubled your money in the same period.

That means the stock is trading at a historically cheap valuation. It can be bought at a price-earnings ratio of 21.4. Over the past 10 years, the stock has rarely been cheaper, showing just how bad the market has gotten for Nike’s business.

This seems like a good time to buy stocks. But that’s only true if you believe Nike will be able to right the ship and return to healthy revenue and profit growth.