After a string of disappointing quarters, Nike (NKE) shares bounced back on Wednesday this week, rising 6.5% on the heels of a stronger-than-expected Q1 earnings report. Bullish momentum has only stopped at the 200-day SMA at around $74.25 per share. The results offered a few bright spots, but the company continues to wrestle with a range of headwinds — and I remain Bearish on the stock for one overriding reason.
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Underwhelming Results
Nike (NKE) shares climbed 6.5% after the Oregon-based company reported its fiscal Q1 earnings. The results were better than many investors feared, but they still paint a picture of a company under pressure. Revenue was expected to fall 3%, yet Nike managed a modest 1% increase — technically a beat, but less impressive when factoring in a 1% decline on a constant-currency basis. That hardly signals growth, even if it cleared Wall Street’s low bar.
Earnings per share came in at $0.49, handily surpassing analyst estimates of $0.27. Still, that figure marked a steep drop from last year’s $0.70 per share, underscoring the company’s deteriorating profitability. Margins told a similar story: gross margin of 42.2% edged past forecasts of 41.7%, but was down 3.2 percentage points from a year ago. The primary driver was a lower average selling price, suggesting Nike was forced to discount heavily — a clear warning sign given softer consumer demand.
That’s a troubling dynamic as Nike faces rising competition. Trendier brands like Asics (ASCCF) and New Balance are capturing younger buyers, while upstarts such as On Holding AG (ONON) and Hoka (part of Deckers Outdoor, $DECK) continue to gain momentum. Traditional rival Adidas (ADDYY) also remains in the mix, leaving Nike at a competitive disadvantage in a crowded landscape.
Digging deeper, the report revealed other weak spots. Direct sales declined 4% year-over-year, China sales fell 9%, and Converse sales plunged 27%. Management acknowledged that both Converse and its China business will remain under pressure through 2026, and signaled that direct sales are unlikely to return to growth this fiscal year.
There were bright spots, however. Wholesale revenue rose 7% year-over-year, and North American sales grew 4%. Shareholder returns were another positive: Nike paid out $591 million in dividends during the quarter and repurchased $123 million of stock, reflecting a 2.16% dividend yield.
To be fair, few investors were caught off guard by the declines in earnings, revenue, or margins. The market had already priced in weak performance, and Nike shares remain down 16% over the past 12 months even after the post-earnings rally. What’s striking is that the company’s valuation doesn’t fully mirror its muted fundamentals. That disconnect raises the question of whether the recent bounce represents a genuine turnaround — or just a temporary reprieve.
Premium Valuation
Nike’s latest results were decent and may hint at the early stages of a comeback, but they’re not enough to make me bullish. The issue is valuation. Shares trade at roughly 42x forward earnings estimates — nearly double the S&P 500’s forward multiple of 22.5x.
By contrast, several of Nike’s peers trade at far more attractive valuations: Lululemon Athletica (LULU) at just 13.6x 2025 earnings estimates, Deckers Outdoor (DECK) at 16x, and Adidas (ADDYY) at 23.7x — roughly half of Nike’s multiple.
Even Nike itself is guiding for revenue to decline by low single digits in the upcoming quarter. Against that backdrop, it’s difficult to justify paying nearly twice the market multiple for a stock that’s still in the earliest stages of a possible turnaround and showing no real growth.
Is Nike a Buy, Sell, or Hold?
On Wall Street, Nike carries a Moderate Buy consensus rating, with 18 analysts calling it a Buy and 11 maintaining a Hold over the past three months. NKE’s average price target sits at $83.60, suggesting almost 15% upside potential from current levels.
Nike’s Q1 Beat Isn’t Enough to Justify Its Lofty Valuation
Nike’s Q1 report delivered some bright spots, but not enough to make the stock appealing at current levels. Shares continue to trade at nearly double the S&P 500’s valuation and at a hefty premium to peers, despite ongoing challenges and sluggish revenue growth. A turnaround may be in progress, but even management admits the recovery will take time — and that makes the stock’s lofty price hard to justify for what looks like a slow climb back.