History repeats itself, yet again. For years, Nike (NKE) and the basketball world anxiously awaited for the next Michael Jordan to emerge, out of the likes of Anfernee "Penny" Hardaway, Vince Carter, and even, Harold Minor. Today, Kobe Bryant and LeBron James headline the Nike basketball roster. Kobe Bryant, 35, is soon to ride off into the sunset, after having won five NBA championships. Meanwhile, LeBron James, 28, enters his prime years with two titles already on the mantle. As with Michael and Kobe before him, the sporting world is now abuzz to crown the latest young sensation as the next King James.
Enter Andrew Wiggins. Andrew Wiggins has come of age amid the 24/7/365 news cycle driven by Web 2.0 components Google (GOOG), Twitter (TWTR), Facebook (FB), and Instagram. The naysayers, of course, have already stepped into the fray to reject the hype and expose holes within Wiggins' game. Still, numerous sources familiar with the matter have already indicated that Adidas (OTCQX:ADDYY) is ready and willing to offer Wiggins a 10-year, $180 million endorsement contract, upon his declaration for the NBA draft. Nike is expected to match any offer coming out of the Adidas camp in this latest bidding war. For Nike, the Andrew Wiggins signing would further solidify their dominant position above the American sporting world. Wall Street analysts would refer to and looming Wiggins deal as goodwill, while billionaire Warren Buffett may portray the Nike business model as comparable to operating behind a moat.
Andrew Wiggins' Game
On June 5, 2005, Billy Hunter, the then NBA Players' Association President, and NBA Commissioner David Stern agreed upon a new collective bargaining agreement. As part of this collective bargaining agreement, the NBA set the minimum age to enter the League at 19, while also making adjustments to the rookie pay scale. NBA draft picks taken in the first round were then guaranteed two-year contracts, with teams being able to exercise options to re-sign the player in his third and fourth years. The NCAA, of course, has defined its own players as amateur student-athletes, who are prohibited from taking cash and entertaining business offers. These contradictory statutes are the backdrop against an awkward tango between rabid basketball fans, promising young athletes, agents, corporations, and NBA general managers. In this case, Nike must be willing to follow the rules, while also working the correct back channels to bring Andrew Wiggins into the fold.
Prior to the latest collective bargaining agreement, Andrew Wiggins would have been a lock as the number-one overall NBA draft pick, out of high school. At this junction in time, however, Wiggins is likely to follow a precession of "one-and-dones" that include Derrick Rose, John Wall, and Nike pitchman Kevin Durant. Wiggins' draft stock has also taken somewhat of a hit early this college basketball season. Andrew Wiggins is averaging a somewhat pedestrian 14/6/2 in points, rebounds, and assists per game as a freshman guard at Kansas. Iona guard Sean Armand has already dismissed Wiggins as "overrated." Although Wiggins has shown flashes of greatness, scouts have questioned his moxie to take over games, instead of passively blending into the Jayhawk system. As a raw athlete, Wiggins may dominate at the next level, if he were to improve his ball handling and outside scoring touch. For Nike, Andrew Wiggins nascent career is comparable to a call option with somewhat staggering boom and bust potential.
At the moment, Wiggins is no longer head and shoulders above his collegiate competition. Fellow freshmen Jabari Parker at Duke and Julius Randle at Kentucky have showcased great polish and intensity on the floor this season. Randle, Wiggins, and Parker are likely to jockey for position atop various 2014 NBA draft boards throughout the course of this year. Still, Wiggins will remain the foremost prospect to help Nike sell shoes, if only for his highlight reel dunks.
Nike Vs. Adidas in Basketball
Taken together, Nike and its Jordan brand endorse a combined 211 NBA players. Again, LeBron James, at the apex of his game, is the leading man of the Nike roster. The Nike list also includes perennial and popular NBA All-Stars Kobe Bryant, Dirk Nowitzki, Kevin Durant, Carmelo Anthony, Chris Paul, and Blake Griffin. The Adidas roster of 66 players features point man Derrick Rose out front of Dwight Howard, John Wall, Josh Smith, and Tim Duncan. Chicago Bulls guard Derrick Rose, unfortunately, has lost roughly two regular seasons of time, due to severe knee injuries. An impromptu pick-up game between these two camps may very well result in a blow out for the Nike All-Stars.
Earlier this year, on May 22, 2013, research firm SportsOneSource issued a report listing out the most popular basketball shoes sold during the 2012 calendar year. Last year, LeBron James' signature shoes accounted for $300 million in sales at Nike, which was a 50% improvement above the 2011 campaign. In 2012, King James won his fourth NBA MVP award, second Olympic Gold Medal, and first NBA Championship. Beneath James, signature shoes endorsed by Kobe Bryant, Carmelo Anthony, and Kevin Durant generated $50 million, $40 million, and $35 million, in Nike revenue, respectfully. In all, the Nike and Jordan brands combined to lord over a 93% share of the 2012 basketball shoe market. For the sake of comparison, Adidas controlled a mere 5% share of basketball shoes sold last year.
Andrew Wiggins and his representatives, of course, may play Nike and Adidas off of each other, in order to escalate a bidding war for the star's services. According to Bleacher Report, two sources familiar with the matter have already indicated that Andrew Wiggins wore Nike shoes as an adolescent. Nike sponsored Wiggins' former AAU club, the CIA Bounce, out of Ontario. In college today, this wing player suits up for a Kansas Jayhawk athletic program that recently extended its own partnership deal with Adidas through 2019. Still, a strong case can be made that Wiggins will make the switch back to Nike, once he owns the self-direction to literally Just Do It, as a professional athlete.
The Bottom Line
Again, Nike should relate to Andrew Wiggins' career, as if it were a call option. As such, Beaverton can afford to sign Wiggins to an endorsement deal ranging between $10 million and $20 million, per year. At minimum, Wiggins does possess the natural talent to emerge as a serviceable starter at the NBA level. Nike may then lose a few million dollars on this deal, each season. Nike may expect Wiggins' shoes to generate at least $30 million in annual revenue, if the young kid were to work on his game and perform at an All-Star level. Beginning in 2014, Nike may then project that it can take down $3 million of annual net income, strictly based upon the Andrew Wiggins deal. In this case, the business relationship would result more so in the expansion of Nike goodwill, above nominal dollars and cents profits.
The signing of Andrew Wiggins would confirm that Nike remains the dominant sporting goods brand. On May 31, Nike closed its latest 2013 fiscal year having taken down $2.5 billion in net income off $25.3 billion in revenue. Nike has averaged 13.7% annual net income growth, over the course of the past four years. Nike Q1 2014 net income was to increase to $780 million, for a 38% advance above the year-over-year quarter. On December 6, 2013, Nike stock completed the trading session at $79.68 per share, which did calculate out to $70.9 billion in market capitalization. At these levels, Nike shares trade near a relatively high 30 times current earnings. Conservative investors should consider dollar-cost-averaging into this stock, as a long-term holding.