Nike Is Fighting Back, But Adidas Is Still Heating Up

Summary

• Nike is fighting back against Adidas, and NKE stock has rallied over the past several months as a result.
• But the Adidas threat isn't going away any time soon; if anything, it's getting stronger.
• The current valuation on NKE stock seems to neglect this still-rising competitive threat from Adidas.

Back in mid-2017, Nike (NYSE:NKE) stock was priced as if it were going to lose its spot atop the athletic retail market to surging Adidas (OTCQX:ADDYY). We said such concerns were overdone, and bought the dip in NKE stock because we viewed the company's dominance in athletic retail as something that would last into the foreseeable future.

Since then, NKE stock has been a big winner, rising nearly 30% and outperforming not only the S&P 500, but also peers Adidas and Under Armour (UAA). We feel, however, that this rally is largely over. Nike won't lose its spot atop the athletic retail market anytime soon, but the company also hasn't entirely quelled the Adidas threat. If anything, Adidas is only growing stronger, and at these levels, there isn't much more room for NKE stock to run higher while Adidas continues to gain mind-share. As such, we think investors should avoid NKE stock here and now due to the still-rising Adidas threat.

NKE data by YCharts

Much like its signature athletes (LeBron James and Michael Jordan) are in the NBA world, Nike is the best-in-class in the athletic retail world. The company has built the world's most recognizable and popular athletic retail brand by creating high-quality products, leveraging high-profile athlete endorsements, establishing a wide and unparalleled global distribution network, and investing big in the right high-growth areas. Because of this, Nike has time and time again fought off competitors who have tried to dethrone the athletic retail king.

A few years back, Under Armour tried to dethrone Nike by using an underdog narrative with NBA superstar Stephen Curry as their spokesperson. It worked. For a while. But eventually, Stephen Curry and Under Armour faded in popularity, and Nike won out with its wide-moat.

This time around, Adidas is knocking on Nike's door. And it has been working. Adidas has leveraged lifestyle-oriented endorsements (Kanye West) and a rise in popularity of retro styles to drive robust growth, especially in the North America market. Meanwhile, Nike has struggled to keep pace. NKE stock dropped. ADDYY stock rocked higher. This discrepancy occurred despite NKE growing the strength of its balance sheet, operating at considerably higher profit margins, and having a bigger dividend yield. In other words, those financials haven't mattered over the past several years because Adidas has been killing Nike where it matters most, and that is on revenue growth.

ADDYY data by YCharts

ADDYY Cash and Equivalents to Market Cap (Quarterly) data by YCharts

ADDYY Revenue (Quarterly YoY Growth) data by YCharts

Nike is finally fighting back. The company is pushing product innovation through its pipeline like never before (the company's newest styles, like VaporMax, Epic React, and AirMax, have seen huge increases in online popularity over the past 12 months). The company is also investing major dollars into its stores and direct selling channels (Nike is planning a new flagship store in New York which will be outfitted with every bell and whistle possible). Nike is also acquiring technology companies to give its brand a modern face-lift, including a data analytics firm and a computer vision company. Nike has also been aggressively chasing athletes, and recently signed a big-time deal with rising NBA superstar Giannis Antetokounmpo. Because of all these pursuits, Nike is reportedly near a critical inflection point in the North American market, according to management.

As such, things appear to be getting better for Nike. That is why NKE stock has rallied 30% over the past several months.

But the Adidas threat hasn't gone away. If anything, Adidas has only grown stronger. Its revenue growth rate is still climbing and hit a 5-year high last quarter. Meanwhile, Nike's multi-year revenue growth rate trend is still slightly down to flat. Moreover, Adidas continues to steal schools away from Nike partnerships and there are rumors popping that widely followed hip-hop artist Drake may be joining Kanye West at Adidas, a move which would only bolster the brand's "coolness".

ADDYY Revenue (Quarterly YoY Growth) data by YCharts

Thus, going forward, Nike is a tug-of-war story between improving growth prospects from smarter investments and still increasing competition from Adidas. The current valuation on NKE stock seems to focus on the good of that tug-of-war and ignore the bad. NKE stock currently trades at nearly 22x trailing EBITDA, which is right around all-time highs. An all-time high valuation on NKE stock would make sense only if the company were looking at its best growth prospects ever. But the company isn't, mostly because the Adidas threat is still rising.

NKE EV to EBITDA (TTM) data by YCharts

All in all, we believe NKE stock is a long-term winner due to its dominant positioning in the very big and very important athletic retail market. But Nike is still facing a rising Adidas threat, and the current valuation on NKE stock seems to neglect that rising threat. As such, the stock looks susceptible to pullbacks in the near-term.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s 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.