Nike (NKE) stock climbed 7.0 % this afternoon. According to our metrics, the company seems overvalued at today's prices. In the below analysis, we will put Nike's valuation in the context of its mixed growth prospects and positive market sentiment, which are also strong drivers for share price.
NIKE, Inc., together with its subsidiaries, designs, develops, markets, and sells athletic footwear, apparel, equipment, accessories, and services worldwide. The large-cap Consumer Discretionary company is based in Beaverton, United States and has 83,700 full time employees.
NKE Has a Higher P/E Ratio Than the Sector Average
Compared to the Consumer Discretionary sector's average of 22.33, Nike has a trailing twelve month price to earnings (P/E) ratio of 29.6 and an expected P/E ratio of 22.1. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $3.24 or forward earnings per share of $4.34.
Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Nike's P/E ratio is higher than its sector average of 22.33, we can deduce that the market is overvaluing the company's earnings.
Nike Is Fairly Valued in Terms of Expected Growth
Another factor pointing to Nike's value is its PEG ratio of 1.63. This is the stock's price to earnings ratio divided by its estimated earnings growth rate. If the resulting ratio is near or lower than 1 -- but higher than 0 -- its indicates that the company is faitly valued in terms of expected growth.
NKE Has an Alarming P/B Ratio
The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.
Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Nike's P/B ratio of 10.49 is higher than its sector average of 3.12, such a margin of safety does not exist for the stock.
NKE's Weak Cash Flow Generation Is Troubling
The table below shows that Nike is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in Nike's case, free cash flow is growing at an average rate of 0.0% with a coefficient of variability of 10454521346.4%. We can also see that cash flows from operations are evolving at a 0.0% rate, versus 0.0%:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-07-21 | 5,188,000 | -758,000 | 5,946,000 | -19.12 |
| 2021-07-20 | 6,657,000 | -695,000 | 7,352,000 | 105.88 |
| 2020-07-24 | 2,485,000 | -1,086,000 | 3,571,000 | -49.15 |
| 2019-07-23 | 5,903,000 | -1,119,000 | 7,022,000 | 17.42 |
| 2018-07-25 | 4,955,000 | -1,025,000 | 5,980,000 | 26.37 |
| 2017-07-20 | 3,640,000 | -1,092,000 | 4,732,000 |
Nike's Margins Are Strong
If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing Nike's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.
Nike's Gross Margins
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-07-21 | 46,710,000 | -25,231,000 | 46 | 2.22 |
| 2021-07-20 | 44,538,000 | -24,576,000 | 45 | 4.65 |
| 2020-07-24 | 37,403,000 | -21,162,000 | 43 | -4.44 |
| 2019-07-23 | 39,117,000 | -21,643,000 | 45 | 2.27 |
| 2018-07-25 | 36,397,000 | -20,441,000 | 44 | -2.22 |
| 2017-07-20 | 34,350,000 | -19,038,000 | 45 |
Nike's Operating Margins
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-07-21 | 46,710,000 | -14,804,000 | 14 | -12.5 |
| 2021-07-20 | 44,538,000 | -13,025,000 | 16 | 100.0 |
| 2020-07-24 | 37,403,000 | -13,126,000 | 8 | -33.33 |
| 2019-07-23 | 39,117,000 | -12,702,000 | 12 | 0.0 |
| 2018-07-25 | 36,397,000 | -11,511,000 | 12 | -14.29 |
| 2017-07-20 | 34,350,000 | -10,563,000 | 14 |
Nike's cost of revenue is growing at a rate of -0.0% in contrast to -11.3% for operating expenses. Sales revenues, on the other hand, have experienced a 0.0% growth rate. As a result, the average gross margins growth is -0.0 and the average operating margins growth rate is 0.3, with coefficients of variability of 2.3% and 21.6% respectively.
Nike Benefits From Positive Market Signals
The market sentiment regarding Nike is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $151.87 to $88.0. NKE is trading -21.18% away from its target price of $121.66. 1.7% of the company's shares are tied to short positions, and 83.7% of the shares are held by institutional investors.
| Date Reported | Holder | Percentage | Shares | Value |
|---|---|---|---|---|
| 2023-06-30 | Vanguard Group Inc | 9% | 107,811,493 | $10,338,043,997 |
| 2023-06-30 | Blackrock Inc. | 8% | 92,826,102 | $8,901,094,864 |
| 2023-06-30 | State Street Corporation | 5% | 55,210,541 | $5,294,138,742 |
| 2023-06-30 | Morgan Stanley | 2% | 29,262,774 | $2,806,007,380 |
| 2023-06-30 | Wellington Management Group, LLP | 2% | 28,655,755 | $2,747,800,329 |
| 2023-06-30 | Geode Capital Management, LLC | 2% | 22,909,832 | $2,196,823,776 |
| 2023-06-30 | Alliancebernstein L.P. | 2% | 22,371,886 | $2,145,240,134 |
| 2023-06-30 | Bank Of New York Mellon Corporation | 2% | 20,125,655 | $1,929,849,045 |
| 2023-06-30 | Capital International Investors | 2% | 19,412,282 | $1,861,443,709 |
| 2023-06-30 | FMR, LLC | 2% | 18,376,663 | $1,762,138,203 |
