Is Nike Set for a Good Run?

When three top analysts make positive comments about a stock on the same day after it has been trading poorly, it gets the market's attention.

On Thursday, J.P. Morgan, UBS, and Jefferies all were very positive about Nike (NKE) after meeting with management at a sell-side event in New York City. Although the stock rallied almost 5% after the commentary, and Nike shares trade at an elevated valuation of 35x earnings, the stock is still 25% off its high and could be set to outperform.

Nike has been somewhat weak from concerns about exposure to China, supply-chain bottlenecks, rising commodity costs, and the durability of consumer spending. These fears have mostly been allayed after analysts met with management. Focusing on Nike's strengths and seeing the glass half full, the opportunity ahead for the company could still be enormous.

UBS' Jay Sole believes North American demand is especially robust and that the impact of China's lockdown and supply-chain issues are already factored into Nike's guidance. Sole sees an ample opportunity in Nike's new format stores, Nike Live. These stores can more effectively target women's apparel and strengthen consumer ties. Lastly, he's confident in the company's innovation pipeline and ability to improve gross margins.

J.P. Morgan's Matt Boss comes away from management conversations bullish on Nike's fundamental inflection in China. He notes the consumer in China is responding well to incremental supply and increased marketing. Boss sees a pent-up innovation pipeline leading to "a strong growth foundation" in place for fiscal year 2023. The analyst is also bullish on the outlook for margins from full-priced selling and lapping of elevated logistic expenses.

Jefferies' Randal Konik sees a strong pricing environment persisting through 2022. Konik notes Nike's direct sales leading to a positive impact on margins, and the digital transformation, including metaverse initiatives and a partnership with Roblox (RBLX) , engaging the next generation of consumers. With $4 billion in cash, Nike's strong balance sheet also gives Konik comfort in an uncertain macro environment.

In Piper's recently published semi-annual teen survey, Nike topped the list in "Favorite Apparel Brand." Thirty percent of respondents named Nike as their top apparel brand, up from 27% over the prior three surveys. Nike far outpaces the runner-up, American Eagle (AEO) , at 7%. Overall, a confidence-building data point for Nike's enduring brand strength.

Certainly, Nike trades at a premium valuation and risks abound. Dollar strength, supply-chain snarls, weak economic growth, commodity inflation, and high logistic costs can still undermine Nike's revenues and profit margins. Yet, as long as the company continues to execute and out-innovate the competition, the stock can perform well.

Wall Street had been overly concerned that Nike would stumble from various headwinds, but management signaled these fears were overdone. Analysts have put the focus back on Nike's strengths, giving the green light to own the stock for years of solid performance ahead.

At the time of publication, Ginesin had no positions in any securities mentioned.