The markets have gotten off to a roaring start in 2024. The S&P 500 has returned roughly 17% so far this year, while the Nasdaq Composite has surged by 20%. But one stock that hasn't fared so well is Nike (NKE -0.13%). Shares of the footwear and apparel maker have cratered 32% -- making it one of the worst performers in the Dow Jones Industrial Average.
With shares hovering at historically cheap levels, is this an opportunity to buy the dip? Let's dig into what's going on at Nike and assess if now is a lucrative buying opportunity, or if investors are best off sitting this one out.
An uninspiring performance all around
Last month, Nike reported earnings for its fiscal 2024, ended May 31. To put it bluntly, the company's performance was anything but awe-inspiring. For the full year, Nike generated $51.4 billion in revenue -- up just a paltry 1% year over year.
While the company was able to recognize some cost savings from freight and logistics, Nike increased its marketing and advertising budget by 6% in 2024 to $4.3 billion. Considering the mundane level of revenue growth, I think it's fair to ask whether these investments in demand generation were worth the price.
Management's guidance for fiscal 2025 likely didn't inspire much confidence from investors. Revenue is expected to decline in fiscal 2025 by mid-single digits. Nike CEO John Donahoe referred to 2025 as a "transition year" and said that the company is in the midst of a "comeback."
Image source: Getty Images.
Is Nike a comeback story for the ages?
Identifying trends among consumer discretionary goods is incredibly challenging. Preferences can shift instantly, making it difficult for certain businesses to keep up with demand trends. During the earnings call, Nike's management admitted that it's seeing "uneven consumer trends" in certain regions.
Candidly, I see this as a pretty big issue for Nike. Over the last couple of years, footwear brands such as Birkenstock and Crocs have experienced both abnormally high and prolonged demand. Considering that one of the biggest byproducts of the COVID-19 pandemic was a broader acceptance of work-from-home environments, it's not entirely surprising to see people opt for more comfortable, lounge-type footwear as opposed to the higher-end athletic or stylish gear offered by the likes of Nike.
With all this said, I think shifting trends among consumer demographics is only one part of Nike's problems. It's no secret that the macroeconomy has been plagued by lingering inflation for nearly two years now. To combat inflation, the Federal Reserve instituted a number of interest rate hikes -- making it more difficult for consumers and businesses to access capital.
I think these broader macroeconomic themes have caused people to scale back spending, particularly on discretionary goods such as shoes or apparel. Although inflation has started to cool down, I personally remain skeptical that people will be rushing out to purchase expensive, luxury sportwear en masse anytime soon.
Is now a good time to buy Nike stock?
Despite all of its operational headaches, investors should keep in mind that Nike is still one of the most iconic brands of all time. It's almost impossible to watch a sporting event and not see Nike's logo somewhere on a jersey or piece of equipment. While I don't necessarily see the business as a falling knife, I do think Nike is going through a bit of an identity crisis.
NKE PE Ratio data by YCharts.
Right now, Nike stock trades at a price-to-earnings (P/E) ratio of 19.8 -- roughly half its 10-year average. Considering its historically low valuation, scooping up shares of Nike definitely looks tempting at the moment.
My take is that, given the poor performance during fiscal 2024 and the underwhelming outlook for fiscal 2025, expectations for Nike have become incredibly low.
This means that should Nike demonstrate even the slightest form of growth in upcoming quarters, the stock could begin to see some new life. For me, Nike presents an interesting but risky investment prospect.
If Nike manages to decelerate more than it guided to do, the stock could very well continue to drop like a rock. Conversely, if the comeback story does begin to take shape, investors will have ample opportunities to get in on the action.
For now, I think the most prudent thing to do is to remain sidelined and keep a close eye on the company's progress throughout the next year.
