- Nike shares are trading near their historical high.
- This has prompted one analyst to call for investors to sell the shares.
- What should long-term Nike investors do?
Nike (NYSE:NKE) stock has enjoyed a stellar year so far. The shares have soared 37.7% YTD, and show no signs of slowing down. Trading at $132.41, Nike stock price is just a shade below its 52-week and historical high of $133.52, reached just a few days ago on Oct. 19. Over the past five years, Nike shares have returned 223%.
Nike stock price 5-Year Returns
Now some analysts have started ganging up on Nike, claiming the shares have run too far too fast. MKM Partners chief technical analyst Jonathan Krinsky recently told Barron’s that Nike has been "an absolutely amazing stock this year," but now is the time to sell after shares hit a 52-week and an all-time high.
Krinsky’s Nike bear thesis is not based on some real or perceived weakness by the company that might tank the shares in future, but on a purely technical basis. Krinsky noted that NKE shares are now trading 26% above its 200-day MA, the widest spread since May 2013. Krinsky points out that the large spread preceded a 10% pullback. In December 2014, Nike shares again exhibited a ~20% spread to the 200-day DMA which was followed by a 9% pullback that happened over the next couple of months. According to Krinsky, if Nike stock corrects to its 50-day MA, it would fall about 13%. The analyst noted that even if Nike stock corrected 20%, it would still trade above its long-term 200-day MA implying it would still be vulnerable to pullbacks.
It’s also worth noting that at least one analyst upgraded the shares around the same time that Krisnky expressed his overvaluation concerns. BB&T Capital upgraded NKE to Buy from Hold on the back of the company’s new strategic initiatives that include expansion of Air Jordan and Converse Brands, as well as the upcoming Rio Olympics.
Investors tend to be quite jittery when a high-flying stock hits an all-time high, and calls such as Krinsky’s tend to resonate with many investors’ fears. But aside from the technical trading aspects of Nike shares, are there any solid reasons to make us believe that Nike will lose its growth momentum?
Nike Shares fairly valued Going by Latest Growth Projections
Nike’s growth remains as solid as ever, and the Nike brand is becoming even more popular across the globe. Nike’s global future orders surged 9% and 17% on a constant currency basis, underlining the popularity of the company’s products.
Nike recently issued an optimistic goal to achieve revenue target of $50 billion by 2020. Nike is on course to realize revenue of $30.6 billion in 2015. This implies that the company expects its top line to expand at an annual rate of roughly 10.3% over the next five years. Nike finished 2014 with revenue growth of 10.08%. Growth during the current year has slowed down to around 9% due to an extremely strong dollar. But forex rates are a two-way street and the FX headwinds that have subdued Nike growth will at some point turn into a tailwind. After all, Nike’s revenue would have grown at 14% during the second quarter without FX effects.
Nike has lately been seeing very strong growth in China, Europe, and other emerging economies. The company projects that China, Emerging Markets, and Central & Eastern Europe will grow in the low double-digits, with revenue in China hitting $6.5 billion by 2020. The company says that it will be reporting the popular Jordan brand separately going forward. The company expects the brand to nearly double to $4.5 billion by 2020.
Investors tend to fret a lot about Skechers (NYSE:SKX) and Under Armour (NYSE:UA) stealing market share from Nike. While these two are formidable competitors, Nike’s revenue base is five times bigger than their combined revenues. Nike is therefore growing much faster than the two in real dollar terms.
Source: GL Investments
And Nike remains the market leader in athletic footwear by a wide margin.
It therefore won’t come as a surprise if Nike easily exceeds its 10.3% CAGR projection over the next five years. Using Nike’s estimate as the company’s growth projection in a Discounted Cash Flow analysis yields a share price of roughly $126 which implies the shares are currently trading at just a 5% premium to their fair value. Nothing to really worry about here.
For short-term traders, Nike shares do appear stretched and could pull back a bit in the near-term due to market jitters regarding their apparent overvaluation. But the long-term outlook remains as solid as ever so long-term investors should continue holding the shares.