Nike Inc: Screaming Value in Nike Stock?

Nike IncDip in Nike Stock Won’t Last Long

High-quality products seldom go on sale. The same can be said for high-quality stocks. That’s why when a pick as good as Nike Inc (NYSE:NKE) stock is taking a dip, you should pay attention.

In the past five years, Nike stock has been climbing quite steadily. There was a good reason for that—the company runs a solid business. But every time you want to buy it, the price just got higher.

Recently, however, there might be an opportunity. Nike stock has fallen as much as 5.8% in the last 30 days. In the past two months, it has dropped 13.3%.

Movements of this magnitude might be common in the technology sector. But for a sports apparel and footwear company, that’s big.

There are two ways to look at Nike stock’s decline. One is that it’s a reflection of fundamental changes in the company’s business. The second is that Mr. Market is just not acting rationally, which could be a great opportunity for those who want to get into Nike stock.

So, is there any fundamental change in Nike’s business?

Not really. Despite being the market leader, Nike does not show signs of slowing down. In fact, its growth in the past several years has been more than impressive.

In the most recent quarter, Nike increased its revenue by eight percent year-over-year to $8.0 billion. Excluding foreign exchange fluctuations, revenue would have been up 14%. The bottom line was even better. Nike grew its earnings per share by 22% year-over-year to $0.55. (Source: “Nike Inc Reports Fiscal 2016 Third Quarter Results,” Nike Inc, March 22, 2016.)

So why is the stock down? Well, its solid revenue number—$8.0 billion—turned out to be less than Wall Street’s estimate of $8.2 billion.

For certain tech companies, a revenue miss might be critical, as it could be a signal of the industry’s momentum. But Nike is not one of those tech companies. It’s a decades-old sportswear company that has beaten Wall Street’s earnings-per-share (EPS) estimates in the past four quarters. (Source: “Analyst Estimates,” Yahoo! Finance, May 18, 2016.)

That’s why I believe this pullback in Nike stock will not last long.

And there’s more. After two years of hibernation, one of the company’s segments might be able to become a catalyst for Nike stock again.

I’m talking about one of the hottest fields today—wearable tech.

In all fairness, Nike always had some presence in wearable tech. But most recently, it hasn’t really done much. The company has been focusing on its “Nike+” app and Nike+ shoes with built-in sensors. This time, though, Nike could make a big appearance in the wearable tech sector.

Earlier this month, the United States Patent and Trademark Office published a patent from Nike. According to the title of the document, it’s about an “Athletic Watch.” In it, it describes “a device for monitoring athletic performance of a user” that is also “configured to be worn by the user.” (Source: “United States Patent No. US 9,329,053 B2,” United States Patent and Trademark Office, May 3, 2016.)

Nike Athletic Watch

Source: U.S. Patent and Trademark Office

So basically, this is the patent for a fitness tracking device. The market for fitness trackers has exploded over the past several years and has lead to the creation of a public company—Fitbit Inc (NYSE:FIT). Now, even Apple Inc. (NASDAQ:AAPL) can be considered a competitor in the industry with the launch of the “Apple Watch” last year.

Even though competition is intense, Nike still has a solid chance of success. The company has its advantage—brand name recognition and high-profile spokespeople. When the biggest sportswear company in the world launches a fitness tracker with NBA superstar LeBron James as its ambassador, there will be a market for it.

The Bottom Line on Nike Stock

At the end of the day, valuations matter. Trading at $56.12 per share, NKE stock has a price-to-earnings (P/E) multiple of approximately 26X. That’s not a high number given the company’s growth potential. In particular, Nike’s multiple is much lower compared to Under Armour Inc’s (NYSE:UA) P/E of more than 68X.

If you have been waiting for an opportunity to get onboard Nike stock, now could be the right time to take a closer look.