Nike Stock Price is Down 7% – Time to Buy NKE Stock?

The price of Nike is down 7% from its post-pandemic peak of $146.7 per share after the company failed to live up to the market’s expectations for the third quarter of its 2021 fiscal year as sales came in almost 6% below analysts’ forecasts.

Meanwhile, the technical setup in Nike stock shows that the latest drop in the price has been preceded by the rejection of a key resistance level at $138.5 per share, which reinforces a bearish outlook for the apparel company.

Could this be an opportunity to short-sell a stock that is displaying a technical weakness or is it time to buy a company with a strong brand at an attractive valuation?

The following article takes a closer look at NKE’s technical setup along with performing a fundamental analysis of the business to identify the kind of opportunity that this latest drop is presenting.

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Nike stock – technical analysis

The outlook for Nike shares appears to be bearish based on the latest price action seen by the stock, as market participants have rejected a move above the $138.5 threshold at least 6 times now.

Meanwhile, investors should expect a fair share of volatility in the stock price this week as the company will be reporting its quarterly earnings covering the fourth quarter of its 2021 fiscal year next Thursday, with options prices implying a 4.4% move in the stock for the week following the release of the company’s quarterly results.

Investors should keep an eye on how the price action reacts to the earnings release, with two key resistance levels to watch at $138.5 and $134.5. A rejection of any of these two levels in the following days should lead to a sharp drop in the stock price while a move above $138.5 could set things in motion for a fresh bullish cycle for Nike on the back of analysts’ bullish forecasts for the stock.

Nike stock – fundamental analysis

Nike sales had been growing at a steady pace from 2011 until 2019, moving from $20.12 billion to $39.11 billion before the pandemic stroked at a compounded annual growth rate of 8.67%, although in the past four years the rate at which the firm’s top-line had been growing has decelerated to the mid-single-digit range.

The company currently operates three different segments which are footwear, apparel, and equipment, with the footwear unit account for at least 77% of the company’s top-line.

Meanwhile, Nike’s gross profit margins have stood above the 40% threshold in the past 9 years at least while EBITDA and net profit margins have moved between 11% and 16% and 5% to 12% respectively.

Moreover, according to the firm’s latest quarterly report, Nike held a total of $9.4 billion in long-term debt, while its net debt ended the period at $900 million, resulting in a 0.17x Net-Debt-to-EBITDA ratio using the firm’s last twelve months’ results.

From 2011 to 2019, the firm has also been able to ramp up its free cash flow from $1.4 billion to as much as $4.8% billion at a 16.7% CAGR, while the number came down to $1.3 billion last year amid the fallout caused by the pandemic.

Analysts consensus estimates see Nike sales landing at $43.33 billion this year, while earnings per share are expected to land at $3.14, which results in a forward price-to-earnings ratio of 41. However, after deducting the firm’s total cash and equivalents held by the end of the latest fiscal quarter, that multiple comes down to 38.

Based on the rate at which Nike’s cash flow and earnings have been growing in the past, that valuation multiple seems a bit stretched since the company has been able to grow its bottom-line profitability at an 8.4% CAGR, which results in a price-to-earnings-to-growth ratio of 4.5 – way too high by all means.

This apparent overvaluation could explain why Nike stock is down 8% so far this year as market participants could be reassessing the firm’s valuation. However, analysts’ ratings remain bullish for Nike, with 24 buy recommendations on a total of 29 ratings.

Meanwhile, the consensus price target for the stock is sitting at $161.55 per share according to data from Seeking Alpha, which results in a 24.6% upside potential if that target is hit.

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