Athletic apparel giant Nike (NYSE: NKE) is known around the world and is easily recognizable by its swoosh logo. But sometimes, even an iconic company can dip into bargain territory, and Nike stock now carries an unusually cheap valuation.
Consider that its market cap is currently about $113 billion, and it generated revenue of over $51 billion in its fiscal 2024. This means that Nike stock trades at a price-to-sales (P/S) ratio of a little more than 2 — the cheapest the stock has been by that metric in more than a decade.
Valuation metrics such as the P/S ratio can be helpful for investors trying to decide whether or not a stock is attractively priced. Another key valuation metric is the price-to-earnings (P/E) ratio, and it may be more helpful in understanding why this concept is useful.
Let’s imagine a company earns its investors $10-per-share in profits annually and each share is priced at $100. That would give it a P/E ratio of 10. If you had $100 to buy a share in the company outright, you’d make your $100 back in 10 years if profits held steady. By contrast, if the company only made $1 in annual earnings (and thus had a P/E ratio of 100), it would take 100 years to recoup your investment. That wouldn’t be as attractive, all things being equal.
In the case of Nike, its P/E ratio of 20 is also the cheapest it’s been in over a decade.
Therefore, it’s never been cheaper in the past decade to become a part-owner of Nike’s business. But not all cheap entry points are worth buying. Is Nike’s low share price a buying opportunity or a signal to avoid the stock?
What do Nike shareholders have to look forward to?
Among the things that can create shareholder value, revenue growth is at the top of the list. But growth is hard to come by for Nike at its size. Its revenue rose by less than 1% in its fiscal 2024, which ended June 27. And in its fiscal 2025, management believes its revenues will dip modestly.
Another helpful thing for investors in a business is when its profit margins improve. But again, in Nike’s case, I don’t believe that’s a realistic expectation. This is a mature business, and its margins have stayed within a tight range for a long time. They aren’t likely to meaningfully improve anytime soon, considering that nothing has structurally changed with the business recently.
That said, Nike’s margins are good, and management frequently returns cash to shareholders by repurchasing shares and by paying regular dividends. Over the last five years, share repurchases have helped boost earnings per share (EPS) by nearly 40%, and management has increased the dividend by nearly 70%.
Share repurchases and dividends are two of the biggest positives that Nike shareholders have to look forward to.
Is Nike stock a buy at these cheap levels?
Nike isn’t necessarily a risky investment — this business is well-established. But it’s not growing significantly. Investors can hope for a modest revenue uptick after fiscal 2025. But beyond that, I believe any upside for the stock will come mostly from share repurchases and dividends. Therefore, if you’re a growth investor, Nike is likely a stock to avoid.
If you’re a value investor, though, Nike might sound appealing since it’s trading at once-in-a-decade lows. But before I give the impression that this is a fleeting opportunity to pounce on, there’s some important context to consider.
Nike stock has traded lately at its lowest valuation in a decade, yes. But on a P/E basis, it’s not trading at a much cheaper valuation than the average for an S&P 500 stock.
I don’t believe Nike stock is a bad investment today, but its returns from here might be close to average, considering its limited growth prospects. For this somewhat average opportunity, investors are getting a little lower than average valuation. That could make sense for some investors based on individual investing preferences. But others may want to look elsewhere for better upside opportunities.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
Nike Stock Hasn’t Been This Cheap in Over a Decade. Is This a Buying Opportunity or Are There Good Reasons to Avoid It? was originally published by The Motley Fool
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