- Nike is projecting revenue of $50 billion by 2020.
- Valuation using current growth rate indicates Nike stock is trading at a huge discount with over 50% upside potential.
- Don't let the growth rate of their smaller competitors distract you from this investment.
Nike (NYSE:NKE) said that by 2020 they will hit $50 billion in sales, and yet investors don’t seem at all bothered – and they shouldn’t be. Given Nike’s double digit growth rate, it is actually very feasible to think that the footwear giant will meet and potentially exceed those expectations. For the fiscal year 2015, Nike’s revenue was over $30 billion, up 10% from the year prior. If they continue forward with a 10% compound annual growth rate, Nike will hit their $50 billion target for 2020.
So how can Nike grow to hit $50 billion in revenue? First of all, they are expecting their e-commerce business to grow to $7 billion by 2020, compared to the current $1 billion today. Secondly, they are pumping money into the women market, trying to grow their women’s segment from $5.7 billion to over $11 billion. And finally, they can capitalize on the “athleisure” trend by diversifying their global sales and driving more revenue from overseas. As you can see below, the United States accounted for nearly 45% of Nike’s sales for 2015.
Source: Market Realist
So what does annual revenue of $50 billion mean for Nike stock? Below I have outlined my DCF for Nike. I did a 5 year projection with revenue coming in just shy of $50 billion in 2020. I used a terminal growth rate of 6% and a discount rate of 8%, which is tied exclusively to their cost of equity because they have positive net debt. I used an operating margin that mirrors their current margin, however, Nike has been improving its margins recently. Nevertheless, as competition in athletic apparel increases, margins can thin in order to stay competitive, therefore, I decide to appeal to current/historical margins for the model.
As you can see, I have Nike’s equity valued at $157 billion, significantly higher than their current market capitalization of $103 billion. This implies that Nike stock is trading well below their fair value and offers more than 50% upside to investors.
If the athleisure trend continues, Nike is poised to continue forward with their double-digit top line growth, which will take them to $50 billion in annual revenue by 2020. After breaking it down to the bottom line, Nike is a great value for investors. Competitors like Under Armour (NYSE:UA) and Lulu (NASDAQ:LULU) have stolen a lot of investors’ attention because of their incredible growth rates which significantly exceed Nike’s. However, they still remain significantly smaller and riskier investments. But perhaps the attention of these new athletic apparel companies has been the catalyst that has led to Nike stock trading below its fair value. Either way, the verdict on this one is clear – Nike stock is a buy.