It is more than a sportswear brand. Nike has been a symbol of inspiration and determination. At the core of its business is its goal of empowering individuals around the world to push their limits and achieve their goals through its products that fuse style with functionality. Its entire brand has become synonymous with excellence and performance.
Nevertheless, through its aggressive marketing efforts, Nike has become a household name. It is also one of the most prominent and successful companies in the world. Hence, considering its global reach and leadership, it can also be an enticing investment. This article explores the advantages and disadvantages of investing in Nike stock.
From Just Doing It to Making Bank: The Pros and Cons of Investing in Nike
Pros: Advantages of Nike Stock
Nike is the largest supplier of athletic footwear and apparel in the world. It is also one of the largest sports equipment manufacturers. Its multi-billion valuation has also made it the most valuable brand among sports businesses in the world. The company is also a consistent placer in the Fortune 500 list of the largest corporations in the United States.
The aforementioned recognitions attest to the established global presence of the company and its long-term staying power. Investing in this company means banking on its accomplishments. However, while past triumphs should not be the sole factor in making investment decisions, it is also important to note that Nike is also an innovative company.
Nike has been investing in new technologies to improve efficiency and sustainability. It has developed new materials and manufacturing processes aimed at reducing production costs and environmental impact. The company does this while developing innovative and trend-setting products in the market. Below are the specific advantages of Nike stock:
• Large-Cap Stock Advantages: Nike is a large-cap stock with a market capitalization of more than $100 billion. Investing in large-cap stocks has benefits over small-cap stocks and mid-cap stocks. These include stability, an established business model, strong management capabilities and corporate governance, transparency and access to market information, and lower liquidity risk.
• Benefits From Growth Investing: It is also interesting to note that this company is also considered a growth stock despite being a large-cap stock. This status comes from its focus on brand recognition and growth via aggressive marketing, consistent and conscious demand generation, and product innovation. Investing in this company adheres to the principles of growth investing.
• Historical Stock Price Growth: Past performance is not a guarantee of future results but it remains an indicator of management capabilities and favorable prospects. The stock price of Nike has been experiencing double-digit percentage growth year-on-year on most occasions. Its stock even grew to more than 250 percent during the last 10 years and further to 1700 percent during the past 20 years.
• Solid Long-Term Investment: Another advantage of Nike stock is that it remains a solid long-term investment due to its market leadership. The sportswear market might be somewhat saturated but it is expected to grow from $293 billion in 2022 to more than $420 billion in 2028 at a compound annual growth rate of 6.6 percent. Growth comes from expanding geographic reach and replenishing consumer base.
• Capable Financial Management: The company has a dedicated finance committee that reviews and approves policies and procedures for managing finances and proposed programs. It also has a specific Financial Transformation Director who plays a key role in identifying and capitalizing value-driving opportunities, and a team of financial disciplines tasked to equip leaders with financial skills.
• Straightforward Growth Strategy: Purchasing and holding Nike stock means investing in its tested and proven growth strategy that revolves around production innovation, aggressive marketing, and value creation through sustainable pursuits and advocacies. This straightforward strategy has helped it maintain its market leadership while also keeping it poised for further growth.
Cons: Disadvantages of Nike Stock
There are still drawbacks and risks associated with investing in Nike. The global operation of the company means that it is exposed to risks from fluctuations in foreign exchange rates. Furthermore, considering that it is part of the consumer discretionary sector, its financial performance is exposed to the boom and bust phases of the economic cycle.
Nike is also exposed to several risks that can affect its corporate image and operations. For example, damage to its reputation can negatively affect its stock price, while also affecting the sales of its production. It also has to deal with supply chain issues, including shortages and logistics, labor shortages and other labor issues, and inflation.
The corporate social responsibility programs of the company might not sit well with some investors who oppose businesses that choose to allocate and spend resources on advocacies or other causes, instead of focusing their efforts on maximizing profit generation for their shareholders. Below are the specific disadvantages of Nike stock:
• Drawbacks of Cyclical Stock: Remember that Nike is both a large-cap stock and a growth stock. However, aside from these two classifications, it is also considered a cyclical stock because it operates within the greater consumer discretionary sector. Its performance, specifically its sales, revenues, and profits, are often tied to the boom and bust phases of the economic cycle.
• Relatively Expensive Stock Price: Another disadvantage of Nike stock is its price. The historical price has remained above $100 since 2021. This stock is twice as expensive as competitors such as Puma and more than 10 times more expensive than emerging brands like Under Armor. It is also more expensive than auto stocks like General Motors and Ford Motor or tech stocks like Intel and AMD.
• Impacts of Competitive Forces: Nike remains a market leader but competition still impacts its current and future performance. The presence of other competitors like Adidas and Under Armor forces it to spend more on marketing activities. Sportswear alternatives and substitute clothing products are also present. Competition also raises the bargaining powers of its consumers and suppliers.
• Exposure to Foreign Exchange Risk: The financial performance of the company is exposed to foreign exchange risk because it caters to different geographic markets around the world. A strong U.S. dollar can hurt its earnings because it generates a considerable portion of its revenue outside the United States and it reduces the value of foreign currency earnings when translated back into U.S. dollars.
• Impacts of Inflationary Environment: Inflation affects Nike in several ways. Higher costs to import goods from factories overseas can create uncertainty around near-term profitability. Periods of high inflation rates also affect the purchasing power of its target market and increase the appeal of cheaper alternatives. Inflation can lead to higher input costs which can reduce its profit margins.
• Risks From the Global Supply Chain: The company depends on a complex global supply chain to manufacture and distribute its products. It is forced to manage the risk of disruptions to its supply chain, which can include natural disasters, political instability, and other factors such as localized supply shortages and supplier bargaining power. Supply chain issues can present near-term risks.