Where will the stocks in operation be in 1 year?

It’s an exciting time for the sportswear industry. Some massive companies such as NIKE and sneakershave led the space for years with product lines covering a wide range of sports and activities. Recently, however, the big players have been challenged by upstarts and specialty brands such as On Holding (ONON -0.76%).

Switzerland-based On burst onto the scene with its shoes for serious runners. The shoes incorporate advanced technology with a distinct look that sets them apart from the competition. There’s no mistaking it for an On shoe, and the company has made a big push into apparel as well.

As Nike cedes shelf space and its stock dwindles, On is growing rapidly. Its share price has followed suit, up nearly 70% year to date. Is this bullish run sustainable? Where will On be in a year? Let’s take a look.

On is delivering huge revenue growth and looking to expand

On’s top line has tripled in the past three years. It reported 28% year-over-year growth in Q2 2024, with revenue of 567.7 million Swiss francs, or $631.7 million. Below, you can see the company’s growth compared to some of its closest peers.

Data by YCharts.

On sees strength in its product offerings and markets, with a huge boost from its expansion into Asia. This market saw currency-neutral revenue growth of 85% last quarter.

Nike built its image on the success of its sponsored athletes, most notably Michael Jordan. This has given him the edge in public perception for years, but On has also successfully blurred the lines between sportswear, fashion and culture. Athleisure is nothing new, but On seems to be maintaining its high-performance edge while expanding its cultural impact. A key partnership is with actress and fashion icon Zendaya, who will be part of a creative campaign for the company called “Dream On.”

Despite its growth, On is not without its challenges

For On to be a winning investment over the long term, it needs to continue to grow and quickly support its premium valuation (more on that later).

This growth rate is difficult for any company, but On is a high-end specialty brand and its core market is somewhat limited. If On wants to move significantly beyond the athletic performance market and capture a broader consumer base, it runs the risk of diluting its brand and losing what makes it special.

In addition, consumers tend to limit their spending on items they consider luxuries during economic downturns. If there is a recession, On’s revenue growth may struggle.

On Holding’s valuation is in the stratosphere

So where will On Holding shares be in a year? Well, it’s impossible to say for sure, and I’m not in the business of setting specific price targets, but I will say this: On’s valuation should give you pause. The company currently has a price-to-earnings (P/E) ratio of 85. This is more than four times the valuations of industry leaders Nike and Lululemon. To really put things into perspective, On sports a multiple higher rating than Nvidia peaked this year.

The market seems to think the price will be justified by the company’s future growth, or at least that’s the idea. But at these levels, I don’t think now is the time to buy the stock. This is an impressive brand that is increasing its reach with consumers, but its valuation is too high, leaving investors with little margin of safety. Stocks could fall and underperform the market at the slightest sign of trouble.