Nike: Just Sell It?

«Be fearful when others are greedy, and be greedy when others are fearful.»

– Warren Buffett, «Buy American. I Am.», The New York Times, October 2008

arvy's teaser: The most famous tick mark on Earth just got kicked out of the S&P 100, lost Mbappé to a running-shoe company from Zürich (guess who 😉), and trades where it did twelve years ago. This week: how a business that tripled became a stock that lost 80%, who is crowding the Swoosh, and the three most dangerous words in investing.

Nike.

Or, as half of your wardrobe calls it: the Swoosh.

Look down. Odds are decent there is one on your feet right now.

«Florian, I am literally wearing them. What is the problem?»

The problem is that our beloved sportswear brand is not having much fun lately. And my heart is bleeding because of it.

Last week, Kylian Mbappé walked out after twenty years with the Swoosh. To On. Yes, On — the running-shoe company from Zürich, co-owned by Roger Federer, a few tram stops from our office. He left for equity and a global role.

The next generation was already gone. Lamine Yamal, the teenager everyone wants, chose Adidas over Nike at fifteen — just as a certain Lionel Messi did in 2006.

The shares are down about 44% this year, at a twelve-year low. And eighty (80!) percent below their all-time high (Chart 1).

Then the indignities turned official. After eighteen years, Nike was deleted from the S&P 100 — the club of America’s hundred biggest companies. It is the single worst performer in the Dow Jones this year. And the rumors have started: next stop, out of the Dow altogether.

This is the brand on Jordan’s feet and on your Sunday run. And the market is treating it like a closing-down sale.

Which begs the obvious, and slightly heretical, question.

Just sell it?

Chart 1: Nike’s maximum drawdown — down roughly 80% from its all-time high, the deepest in its listed history

Nike’s Valuation Didn’t Matter — Until It Did

Here is the part that breaks my heart.

Nothing catastrophic happened to the company.

Look at the two panels (Chart 2). On the left, the business: revenue roughly tripled since 2006, from $15 billion to a $51 billion peak, and still sits near $46 billion today. That is not a company falling apart. That is a company that got three times bigger.

Now look right. The market value went up tenfold, from $21 billion to $212 billion — and then gave back 80% as of today from peak to through (Chart 1). Same two decades. Wildly different rides.

So, what broke, if not the business?

The price.

Or more precisely, the story baked into the price.

In 2006 Nike traded at 15 times earnings — a fair price for a great compounder. By 2021, euphoria had pushed that to 37. The revenue grew threefold; the multiple more than doubled on top. The market was no longer paying for the Nike that existed. It was paying for a Nike that would grow forever, at a pace no $50-billion sportswear company can sustain.

For years, that optimism made the bulls look like geniuses. Then the future merely failed to live up to the price.

Valuation doesn’t matter… until it does, as market participants say. And when it decides to matter, it sends the bill for every year it was ignored.

On top, and as you know, every good story needs a villain. In this one, it is not Adidas. It is the multiple.

Today the multiple sits around 21 — closer to 2006’s sanity than to 2021’s euphoria. Warning or invitation?

That depends on one thing: can Nike still win on the pitch?

Let’s look at the field.

Chart 2: The business tripled; the stock went up 10x, then fell 68%. The price simply assumed a future the company did not deliver

Nike’s Swoosh Is Everywhere — and Surrounded

For thirty years, Nike had one real rival: Adidas. One giant, one challenger, and a lot of daylight behind them.

That world is gone.

Nike is still the biggest brand on the field — roughly a third of the global sneaker market, nearly 29% of U.S. athletic footwear (Chart 3). Nobody is close on scale.

But look at who is crowding in, each attacking a single lane Nike used to own. Adidas, the old twin, is resurgent. On and Hoka have turned premium running — once Nike’s cathedral — into a two-front war. New Balance went from dad-shoe punchline to one of the biggest share-gainers in the market, worn now by supermodels in London and dads in Ohio. Lululemon and Alo Yoga own the athleisure heat Nike keeps chasing. And in China, the growth market that was supposed to be Nike’s, the local champion Anta has overtaken it outright.

None of them will dethrone Nike. That is not the point. A hundred small cuts, each in a different lane, add up — and a giant must fight for ground it once simply owned.

Now the bull’s counterpoint — and it is a strong one. Nike still owns the most powerful brand in sport and has averaged returns on capital of around 24% over five years. Losing a few points of share is not structural decline. Wounded means it is not a finished “Good Story”.

And the price now reflects the wound, not the brand.

Over ten years, Nike’s median P/E was 29.4 and its median free-cash-flow yield 2.8%. Today: about 21 times forward earnings, a 4.2% free-cash-flow yield, and a 4.3% dividend yield.

Wait!?

Here is my favourite irony of the year.

Nike has raised its dividend 24 years in a row. One more increase and it becomes eligible for the Dividend Aristocrats. Kicked out of one elite club — one raise away from joining another.

Bargain or value trap? That is exactly the debate. A wonderful brand, then. But you know our rule — a wonderful business is not automatically a wonderful investment.

So, what does Mr. Market say? And has he already gone too far?

Time for the «Good Chart».

Let’s dig in.

Chart 3: Nike still leads at scale — ~34% of global sneakers, ~29% of U.S. athletic footwear — but the field behind it has never been more crowded

Nike’s «Good Chart»: Despair — or the Bottom That Feels Like One?

There is a chart every investor should have tattooed somewhere they can see it.

The stages of a bubble (Chart 4). Take-off. Media attention. Enthusiasm. Then the blow-off top — delusion, the «new paradigm», denial — followed by the long slide down the other side: fear, capitulation, and right at the bottom, in small letters, despair.

Now lay Nike’s twenty-year chart over it.

It fits like Swiss clockwork.

The take-off through the 2010s. The mania into 2021, the «new paradigm» peak. The bull trap, the return to «normal» that wasn’t. Fear. Capitulation. And now — the S&P 100 ejection, the Dow rumours, the twelve-year low — the last word is being written onto the chart in real time. In red. By myself, admittedly. With a question mark.

If history is any guide, despair is not the end of that chart. It is the last stop before the return to the mean.

But despair alone is not a signal.

We need a catalyst.

A sign of hope.

Anything?

Last week, Alexandre Arnault — son of Bernard, the man who built LVMH into the world’s largest luxury group — joined Nike’s board. The family that turned Louis Vuitton, Dior and Tiffany into pricing-power machines now has a chair at the table of a fallen brand. That is not a turnaround. But it is worth noticing who walks in while everyone else walks out.

So, is it so bad that it has become good again?

Which brings us to the three words from the teaser. Templeton needed four for the most dangerous sentence in investing: «this time it’s different». This one only needs three. Said at the bottom of despair, they have cost investors more than any bubble.

«Just sell it.»

Mind you, I do not know whether this is the bottom. The turnaround is unproven, and «cheap» can always get cheaper. Buffett’s line at the top of this page is the easiest sentence in investing to quote and the hardest to live.

Through our two lenses: the «Good Story» is bruised but breathing. The «Good Chart» is not there yet. For us, Nike sits in the «too hard, watch closely» pile.

Which makes «Just sell it?» the wrong question — and probably too late to ask anyway. The despair is priced. The optimists have surrendered.

The only question left is who is quietly buying their surrender.

Nike — the stage is yours.

You can still do it.

So, just do it.

Chart 4: Nike’s stock walking the textbook stages of a bubble — from «new paradigm» euphoria down to «despair?»

Source: TradingView, arvy