Under Armour (NYSE: UA) shareholders have been on a roller coaster over the last few months. After touching an all time high around $105, the stock started coming down and was recently hammered by a Morgan Stanley downgrade that took it to as low as $67. On January 28 Under Armour announced fourth quarter earnings which pleased investors and the stock jumped more than 20%, settling in the mid-80's as we write.
So how should we view the stock's current price? Is it at a good buy point or has the opportunity vanished with the recent spike?
The stock is currently selling for 88x trailing earnings (49x forward earnings). Those less accustomed to growth stock investing would probably think the valuation is just crazy and would stop reading right here. But let's have a look at the facts.
This stock has been a money-machine for its shareholders. Someone who bought $10 000 worth of Under Armour stock when the company went public in 2005 would be sitting on a cool $135 000, multiplying his money by a factor of over 13 in just a decade.
This stock performance has almost perfectly mirrored the underlying performance of the business, which has grown sales by around 15x during the period. If you go even further back in time, the numbers get staggering. Since the company was created back in 1996, sales have grown by an amazing 225,000x! Clearly someone knows what he is doing here.
Fast forward to the present. Under Armour will clearly be in high growth mode for the foreseeable future. Analysts are calling for a 30% earnings CAGR for the next five years and you know how fast your money multiplies when it compounds at this rate.
The company serves a potentially huge market and still has an enormous runway for growth in front of it. As per the most recent earnings results, it is fair to say that at this stage this company is still mainly an American story. International sales represented just 11% of total sales which is nothing for a type of business that theoretically knows no borders. The international segment grew a whopping 84% on a constant currency basis and there is more of that to come. For an idea of how international growth can add up, note that the company has multiplied its sales in China by a factor of 25(!) in three years only and those sales - currently at circa $75 million - are only a small fraction of what is achieved by larger competitor Nike (NYSE: NKE).
Under Armour has made a name for itself by being a leading innovator in performance apparel, footwear, accessories and, most recently, Connected Fitness. The brand has gained a lot of traction with the younger generations - a key for sustained future success - by signing up young stars across a range of different sports such as Cam Newton and Derrick Williams.
Apart from the international segment, the firm is targeting growth in footwear and looking to increase direct to consumer business from owned stores and internet sales.
The gross margins attained - just under 50% - are excellent. This level of profitability will no doubt attract plenty of competition in the next years and decades and the company will need to stay on top of trends to fend off said competition. A difficult feat, but not impossible as Nike has shown in the footwear business.
For an investor to justify to himself paying Under Armour's current valuation he has to believe that the business will grow at least 15% per annum for the next twenty years. That's an easy achievement for the next five years, perfectly doable for the next ten years and likely over the twenty year time frame.
To put things in perspective, Nike has a market cap 5.7x greater than Under Armour, has been growing between 10% and 25% over the last five years and still carries a P/E of 30. And bear in mind that Under Armour is targeting business lines that Nike has not explored. If these attempts are successful, the company's playing field would be broader that it's rival's. Last but not least, the firm's current investment for growth spree is depressing earnings, so the P/E, although rich by any standard, is less elevated than it might seem.
Finally, what do Howard Schulz, Larry Page, Jeff Bezos, Bill Gates and Steve Jobs have in common? They were visionary CEO's that catapulted their companies to unimaginable heights.
Amazon (NASDAQ: AMZN) has been the greatest growth stock of the last generation. The stock has appreciated nearly 30,000% (!) in less than two decades. During most of its time as a public company, had you decided to wait to buy Amazon for a "reasonable" P/E you would still be waiting. Many investors are permanently predicting the stock's downfall and it has just doubled again over the last three years.
Having confidence that Kevin Plank will drive this company to continued success is not an act of faith. His 20-year track record speaks for itself. Kevin has been a visionary, has consistently set ambitious goals for the company and met them. But the best news is this: the guy is only 43 years old. I am a very happy Starbucks (NYSE: SBUX) shareholder, but no matter how much I dislike the thought I know Howard Schulz will not be around steering the business in twenty years time. Kevin may, if he so wishes.
The consumer business is tough, always prone to changing tastes and aggressive competition and there is nothing a CEO can do to alter the nature of the business. But to have a great CEO on board shifts the odds in your favor.
To sum it up, are investors who buy at these levels going to suffer significant multiple compression over time? Yes. Can those who stick around long enough enjoy good returns? No doubt.
If your time frame is five years or less, Under Armour is likely not for you. With the current entry price, anything could happen. If you want to keep the stock for a long, long time and enjoy the returns shareholders have made on the greatest growth stocks, just go ahead and buy it. There will no doubt be a recession or another negative event to bring the stock down somewhere down the line, but you will have waited in vain if by then the stock is selling for $150.
You have always had to pay up for the greatest growth stocks led by the most visionary leaders. It won't be any different this time.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.