Don't Forget These 3 Top Risks Before You Buy Nike Stock

While the S&P 500 sits near record highs, a well-known company like Nike (NYSE: NKE) has disappointed its investors mightily. Shares currently trade 58% off their peak price from November 2021. And they have declined 16% in the past five years (as of July 30).

But the opportunity might be too hard to pass up, especially since this consumer discretionary stock sells for a price-to-earnings ratio of 19.8, virtually its cheapest level in the past decade. Before you rush to buy Nike shares, however, don't forget these three top risks facing the business.

Competitive landscape

The first risk that's always present for Nike deals with the industry setup. The market for selling clothing and shoes has almost no barriers to entry. An entrepreneur that has capital can come up with an idea and designs and start selling their products online or in stores.

Moreover, there are no switching costs . Consumers can pick and choose whatever company's merchandise they want to buy.

To its credit, though, Nike does possess an economic moat that has allowed it to remain relevant for a long time, while generating ongoing profits. The company's powerful brand is the single most important factor that has supported Nike's success in recent decades. And this has been strengthened by exceptional marketing prowess.

Of course, this doesn't mean the business can rest on its laurels. For the leadership team, the primary focus should be to maintain the brand's image in the eyes of consumers, particularly as competition always remains stiff.

Catering to consumer preferences

Another risk that investors can't forget about again relates to the industry. But this time it has to do with consumers and how their tastes are constantly evolving. This makes the job of an apparel and footwear enterprise like Nike extremely difficult, as it must always try to anticipate what designs people will like before things go into production and hit the store shelves or website.

Nike's long-lasting success sticks out. It clearly deserves the benefit of the doubt when it comes to product innovation, with the Air Jordan brand, as well as the Air Max and Dunk lines, for example. Creating shoes specific to the needs of athletes has also generally been a strength.

But critics will point to the rapid ascent of brands like Deckers ' Hoka and On Holding . This could be proof that Nike is not only failing to serve runners, a key customer cohort, but that its shoes aren't resonating with consumers the way they should.

So, it's of the utmost importance that Nike attempts to get back on top of its game when it comes to product development. "We're moving aggressively to reestablish our innovation edge," CEO John Donahoe said on the earnings call for the fiscal fourth quarter of 2024, ended March 31 . That's an encouraging sign.

DTC or wholesale?

The COVID-19 pandemic was undoubtedly a major economic disruptor that changed consumer behavior. One area that saw a temporary bump was online shopping. To be fair, this was and is a long-term secular trend. But it's safe to say that consumers once again favor buying things in person.

When its e-commerce sales were soaring, Nike made it a point to begin cutting wholesale partners in an effort to boost its direct-to-consumer (DTC) channel. In 2020, the business was sure that digital sales would account for 50% of its overall revenue in the following few years. This didn't pan out. Nike's online sales dropped 10% in the fiscal fourth quarter.

Management is having a hard time figuring out the right distribution strategy that correctly balances the DTC and wholesale channels. It's not an easy problem to solve. DTC sales generate higher margins, as the middleman is removed.

But if consumers still appreciate going to a brick-and-mortar store like Dick's Sporting Goods or Foot Locker , as well as Nike's own company-owned stores, Nike has to be able to serve them with the products that they want where they want. The recent rehire of Tom Peddie as VP of Marketplace Partners looks like the right move.

Shares of this industry leader are cheap, but investors need to be mindful of the risks Nike faces.

Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends Foot Locker and On Holding and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy .