Where Will Nike Stock Be in 5 Years?

With shares down by almost 17% over the last five years, Nike (NYSE: NKE) has generated absolutely no value for shareholders (inclusive of dividends) at a time when the S&P 500 has roughly doubled.

The company is losing relevance in the fitness apparel industry it once dominated. And the impacts of this decline are showing through on its revenue and earnings. Let's dig deeper to see what the next half-decade could have in store for this once-legendary American shoemaker.

How to torpedo a brand

On Nov. 5, 2021, Nike stock reached its all-time high of $172, performing surprisingly well during the COVID-19 pandemic. The health crisis refocused consumers on fitness and comfortable stay-at-home clothing. And increasing rates of online shopping encouraged Nike's management to pivot to a direct-to-consumer (DTC) strategy -- axing out third-party retail partners to sell products straight to consumers.

This turned out to become one of the worst decisions in the sneaker giant's recent history. On the surface, DTC sounds great . By cutting out the middlemen , Nike believed it could boost profit margins and build a closer relationship with its consumers through data and marketing.

However, it turns out that an online store can't quite replicate the personalized experience of in-person shopping , where the customer can compare items from different brands, test the product, and talk to a sales representative about their questions and concerns. Most alarmingly, Nike created a gap in the market, allowing smaller rivals like Hoka to win over casual runners -- especially in the crucial Generation Z demographic.

What do the next five years have in store?

Nike is trying to mend its relationship with third-party retailers, inking deals with Designer Brands and Macy's last June. The company has also enacted sweeping layoffs targeting white-collar positions like vice presidents, directors, and senior directors who may have been partially responsible for the disastrous DTC strategy. Nike is also bringing back a former senior executive, Tom Peddie, who retired in 2020. He will now be vice president of marketplace partners (third-party retailers).

But unfortunately, the cat is out of the bag. Nike has inadvertently strengthened new rivals in its core athletic footwear market, and it can't simply force them to go away. Over the next five years, expect brands like Hoka to continue pressuring Nike's growth potential and margins.

Image source: Getty Images.

In the fiscal fourth quarter that ended May 31, Nike's sales fell by 2% year over year to $12.6 billion, led by the floundering direct-to-consumer business, which dropped 8% to $5.1 billion. While the company remains quite profitable, with a net income of $1.5 billion, investors shouldn't expect massive long-term growth. Nike is a mature company. And it looks like its best days are behind it.

Burning through shareholder capital

And while Nike can no longer rely on explosive growth to drive up its stock price, its efforts at financial engineering aren't working either.

The company repurchased $4.3 billion worth of shares in fiscal 2024, $5.5 billion in 2023, and $4 billion in 2022. That's almost $14 billion spent buying back a stock that has fallen dramatically over the period. It might be unfair to say that money was burned , but it certainly feels like it.

Buybacks have an opportunity cost because the cash could have been invested elsewhere for a return instead of used to buy declining shares. Nike can't repurchase its way out of this mess unless its fundamentals improve. And investors may want to wait on the sidelines until management gets its act together. Expect Nike stock to underperform the S&P 500 over the next five years.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends Designer Brands and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy .