Key Takeaways:
- The 2-Minute Valuation Model values Nike stock at $101/share in 1.5 years.
- This implies that the stock has over 30% upside from its current share price.
- Get accurate financial data on over 100,000 global stocks for free on TIKR >>>
Nike’s stock has fallen over 50% in the past 3 years due to a series of strategic missteps and a lack of product innovation:
Nevertheless, Morningstar still rates Nike as a wide-moat company due to its strong brand, which means the company should be able to earn returns on capital exceeding its cost of capital for at least the next 20 years.
Additionally, many think that Nike’s new CEO, Elliott Hill, can help bring the company back to its roots while fueling growth internationally and through its direct-to-consumer channel.
Today, it looks like Nike is undervalued.
What is the 2-Minute Valuation Model?
There are 3 core factors that drive a stock’s long-term value:
- Revenue Growth: How big the business becomes.
- Margins: How much the business earns in profit.
- Multiple: How much investors are willing to pay for a business’s earnings.
The 2-Minute Valuation Model uses a simple formula to value stocks:
Expected Normalized EPS * Forward P/E ratio = Expected Share Price
Revenue growth and margins drive a company’s long-term normalized earnings per share, or EPS, and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.
Why Nike Looks Undervalued
Forecast
On Nike’s Analyst Estimates tab shown below, you can see analysts expect the company to grow revenue at nearly a 1% compound annual growth rate over the next 2.5 years, with normalized earnings per share, or EPS, expected to decline at roughly 3% annually:
View Nike’s full analyst estimates >>>
For context, this is a big slowdown from the past 5 years, where NIKE’s revenue grew at 5.6% annually, and EPS grew at a 9.7% CAGR.
Valuation Multiple
Nike stock currently trades at around $77 per share, which means the stock trades at around 2.5 times next year’s expected revenue and just over 27 times next year’s expected earnings.
Nike has averaged a 33x forward P/E multiple over the past 5 years. Since the company’s growth is expected to slow down, we’ll use a lower 27x P/E multiple in our valuation:
Value stocks quicker with TIKR >>>
Today, the stock looks fairly undervalued.
Fair Value
2.5 years from now, Nike is expected to reach about $3.62 in normalized EPS. At a 27x NTM P/E multiple, that values Nike stock at $98/share in 1.5 years. We can add an extra $3 per share for the dividends that Nike is expected to pay, bringing the final fair value to $101 per share.
The NTM P/E multiple uses the expected earnings for the next twelve months, so a 1.5-year valuation uses 2.5-year EPS forecast figures. We’re using a 1.5-year valuation because Nike’s fiscal year ends midway through the year.
With the stock trading at about $77 today, this implies that Nike stock could rise 19.8% per year over the next 1.5 years, or 31% in total, to reach this fair value:
The market has averaged about 10% annual returns over the long run, so if Nike could rise 30% in the next year and a half, it would exceed the market’s long-term average. The stock could be interesting for investors looking to invest in a company with a strong brand.
Find the best stocks to buy today with TIKR >>>
Analysts’ Price Target
The consensus analyst price target for Nike today is about $90 per share, which means analysts think the stock has over 15% upside from its current price.
You can see that analysts thought that Nike was undervalued in the past, and today, they think the stock has a fair bit of upside:
Analysts’ price targets can suffer from many biases and aren’t always accurate.
Still, looking at analysts’ consensus price targets can be a great way to get a “second opinion” on your own stock valuation.
TIKR Takeaway
Based on the 2-Minute Valuation Model, it looks like Nike stock is undervalued today, and the stock could go up over 30% in the next year and a half.
Don’t take our word for it—try it out for yourself! Analyze Nike or any stock you’re interested in on TIKR today!
The TIKR Terminal offers industry-leading financial data on over 100,000 stocks and was built for investors who think of buying stocks as buying a piece of a business.
Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. We aim to provide informative and engaging analysis to help empower individuals to make their own investment decisions. Neither TIKR nor our authors hold positions in any of the stocks mentioned in this article. Thank you for reading, and happy investing!
