Why I'm Changing My Mind on Nike Stock

Although I typically avoid stocks in the highly competitive apparel business , I once had a more favorable view of Nike (NYSE: NKE) . It developed a reputation for producing high-quality products. Also, its brands backed by celebrities such as Michael Jordan and Cristiano Ronaldo drove massive sales increases over time.

Unfortunately for Nike, it made one critical misstep that caused its sales to level off -- and that, ultimately, caused its stock price to fall. With one of its main competitive advantages now gone, I have gone negative on the stock. While it is possible it could achieve a turnaround that turns me bullish again, Nike faces an uphill battle that, at the very least, probably makes its stock not worth owning today.

The state of Nike

Nike has long beaten the odds in many respects. Maintaining a competitive moat in the apparel business is a constant struggle. In theory, it would be fairly easy for any would-be rival to start producing footwear, clothing, or sporting equipment. And plenty of brands do.

Thus, to succeed in the business, one has to stand out by producing quality products, marketing them with strong branding, and keeping up with trends. By doing all of that, Nike has maintained a competitive advantage for decades, one so profound that it was tapped to become one of the 30 components of the blue chip Dow Jones Industrial Average in 2013.

However, the fraying of its unique customer relationship may have begun in 2021 when Nike abandoned a store-based distribution model in favor of a direct-to-consumer approach. While that may have reduced its costs in the shorter term, it meant that Nike's products were no longer as easy for customers to see, feel, and try on.

To its credit, the company realized its mistake relatively quickly, and retailers such as Designer Brands 's DSW, Foot Locker , and Dick's Sporting Goods are again selling Nike products. Nonetheless, a host of competitors' products filled the void in stores when Nike left, meaning the company had to start over in a sense to draw customers back.

Nike's financials

The company's latest quarterly results reflect how deeply those earlier strategic mistakes hurt it. In its fiscal 2024, which ended May 31, revenue rose by less than 1% to $51 billion. The only segment to report double-digit percentage revenue growth was its equipment business, but that unit only provides 4% of Nike's revenue. Footwear and apparel, which account for about 95% of its business, registered barely any change in revenues in any part of the world.

Fortunately, Nike was able to cut its cost of sales by 2% and pay 12% less in income tax. That lifted its net income for fiscal 2024 by 12% to $5.7 billion.

Not surprisingly, as revenue has stagnated, enthusiasm for the stock has waned. It has fallen by more than 55% from its peak in November 2021, dropping back to levels last seen during the early stages of the COVID-19 pandemic. The price-to-earnings ratio has dipped to 19, its lowest level over the last five years. After years of a falling stock price, investors are more likely to see Nike as cheap for a reason rather than as a buying opportunity.

Avoid Nike

Though it had a phenomenal, decades-long run, Nike's time as an excellent investment has likely passed. Admittedly, the company likely still holds enough power in the marketplace to keep its revenues steady or maintain lower growth levels. Hence, the stock should avoid further massive declines and could even see some stock price growth.

Nonetheless, Nike's marketing-driven competitive advantage has significantly weakened over the last few years. Its growth has slowed to a trickle and shows no signs of recovery. While a comeback is possible -- and worth watching for -- as conditions appear now, investors should expect further stagnation from the stock, or at best, growth levels that underperform the S&P 500 .

Will Healy 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 Foot Locker and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy .