UA Stock Drops 12% After Reporting 22% Growth: Are the Bears Right?
Steadily growing since its creation in 1996, the Under Armour Inc (NYSE:UA) brand has scored crucial deals with large American sports leagues and stars. Despite this, and despite UA stock’s solid earnings report on October 24, Under Armour stock continues to trade below its 200-day moving average for the year.
It’s a bit of a catch-22 situation. After reporting higher-than-expected revenues and nine percent better earnings for the quarter, investors dropped Under Armour stock. The simple explanation is that investors were impatient. They want the company to focus on earnings growth. Under Armour, meanwhile, wants to push revenue growth and investment, at least for the short term, in order for the company to expand.
The focus on expansion has cut into the earnings guidance for the next few quarters. But is the investors’ bearish sentiment justified?
Perhaps if they are investing with only short-term goals in mind there are better picks, but UA stock has been making the kinds of business shifts that favor a more long-term approach. In that respect, it could be better to think in bullish terms about Under Armour stock.
Three Reasons Why UA Stock Bulls Could Get the Last Laugh
One: Under Armour, which makes a technological line of clothing that few others can challenge, has made a huge break into the basketball world. It’s the next iconic sports brand, and this kind of popularity translates into higher revenues and margins. That’s exactly what the quarterly calls delivered.
Under Armour’s big competitor, Nike Inc (NYSE:NKE), has been losing its shine lately, and Nike stock has dropped. A year ago, NKE stock was trading at $67.00; now, it’s at $51.00 and is on a bearish course. Nike was a big proponent of the Trans Pacific Partnership (TPP), and the ongoing debate over its implementation has hurt the company.
Under Armour is in a different growth stage, and it’s banking on its rising brand popularity. Recently, the company scored a field goal against Nike when it sponsored famed twice-MVP basketball player Stephen Curry, who switched to Under Armour at the end of the 2013 National Basketball Association (NBA) season. That turned out to be a huge deal for UA stock.
The first product to emerge from that partnership was Stephen Curry’s signature basketball shoe. Sales rose 350% in the first three months of 2016, beating sales of any Nike shoe, with the exception of “Nike Jordans.” (Source: “The $14 Billion Man: Why Nike Lost NBA Superstar Stephen Curry to Under Armour,” Under Armour Inc, March 28, 2016.)
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Two: Stephen Curry may have single-handedly doubled the retail sales of Under Armour’s basketball division. But that’s not all, there are more sports partnerships coming; the company signed a major deal with Major League Baseball (MLB).
After successfully challenging Nike in basketball, Under Armour has also displaced traditional MLB supplier Majestic Athletic. Starting in 2020, Under Armour will be associated with another of the most prestigious institutions of American sports. But to earn the kind of revenues that get bulls excited—the kind that can push UA stock toward the $14.0 billion market cap—the company has to secure a major international brand presence. (Source: Ibid)
Under Armour to Sponsor Soccer Players
Three: Basketball and the NBA get many fans worldwide, but the MLB will largely be a North American affair. To get the world’s attention, Under Armour must get some soccer endorsement deals. Once again, it will challenge Nike, which sponsors Real Madrid superstar Cristiano Ronaldo. UA stock is clearly targeting the industry giants like Nike and Adidas AG. This is why the company has been pursuing partnerships within European soccer.
Earlier this year, Bayer Leverkusen (one of Germany’s top teams) player Jonathan Tah, signed a sponsorship contract with Under Armour. This is a surprising choice, as Nike, Adidas, and Puma SE NPV (OTCMKTS:PMMAF) are constantly scouring the European market in search of talent. Tah will give Under Armour plenty of exposure because his team is a regular in the UEFA Champions League, which involves teams from all over Europe.
The Bottom Line on Under Armour Stock
Ultimately, it’s difficult not to be bullish on Under Armour stock. It had growth of 20%, and the company aims to double its 2015 revenue by 2018. If anything, the Under Armour brand has become a victim of its own success. Analysts and investors have grown accustomed to seeing double-digit growth quarters. But naturally, the cycle of growth, while intensive, has slowed since Under Armour stock’s pre-2010 heydays.
Still, Under Armour’s international expansion, its growing number of endorsements, and the sales these bring suggest that UA stock could see a bullish bounce before the end of the year.