Don’t Get Too Excited About Nike (NYSE:NKE) No Matter What Earnings Say

Nike NYSE: NKE will report fourth-quarter earnings on Thursday, June 25. The news is not expected to be good. The earnings report will cover the months of March through June. The company had to suspend retail operations in the United States, its largest market, and the numbers are expected to reflect that.

But that hasn’t seemed to trouble investors too much. The stock has shrugged off the pandemic-induced crash and briefly hit all-time highs in mid-June. And on Monday, June 22, NKE stock was one of the stocks powering the Dow Jones to gains despite fears of a second wave of the novel coronavirus.

So what gives?

In the first place, Nike beat expectations on both its top and bottom lines in its third-quarter earnings report. This was despite the fact that the company had to suspend retail operations in China during much of that time.

Nike has a strong digital marketing ecosystem that they deployed effectively while their stores were shut down in China. The company saw tremendous engagement with their NIKE Training Club and that spilled over into the digital commerce side of the business.

It turns out that as consumers began to work out, they turned to Nike to make sure they had the right athletic wear.

It’s not hard to imagine that investors envision the same playbook being used as Nike reports on June 25.

Nike Could Have to Walk a Careful Line With China

Nike is not a company that is free of controversy. For years, the company has drawn the ire of some Congressional leaders for its close association with China. The company draws criticism for having its manufacturing done in the country.

Nike also found itself in the middle of the National Basketball Association’s dust-up over Hong Kong in October. China will be a central issue in the presidential election this fall. And while, I don’t suspect it will have a long-term issue on Nike or Nike stock, it’s a situation that bears watching for those investors who are looking to get massive gains from NKE stock this year.

Just look at last year. As the trade dispute between the U.S. and China dragged on and on, Nike stock traded in a tight range. The stock only broke out after the announcement of a phase one deal.

And the same may be true for the remainder of 2020. U.S. companies that appear to put short-term profits because of their business with China may have to walk a careful line.

Nike Has Been Able to Straddle That Line

But if any company has shown the ability to walk that tight rope, it’s Nike. Nike has proven to be a leader in addressing social justice concerns. Remember, the company has an ongoing relationship with former NFL quarterback Colin Kaepernick. And the company also continues to have long-standing relationships with many of the athletes who will be looking to use their shoe contracts with Nike to give their voice a platform.

Nike has a firm grasp on the teen market. A recent Piper Sandler survey confirmed Nike remains the number one retail brand and continues to gain share in that regard. As social justice issues continue to be at the forefront of our national news, Nike will continue to have appeal to the younger audience that it needs to be its brand ambassadors.

What if There is a Second Wave?

Nike’s fourth-quarter earnings report will likely show that even the iconic retailer could not stave off the effect of the enforced lockdowns throughout the United States. Government officials strenuously deny that another lockdown will happen. However the more we hear about a rising number of active cases, the more concern there will be that the U.S. economy will continue to have the soft open that it is currently engaged in.

And if consumers have already purchased their athletic wear, how much more revenue can the company realistically expect to capture?

The Bottom Line on Nike

I agree with the bullish premise that Nike stock was heading to all-time highs prior to the pandemic. And I don’t disagree that the company has continued to power its stock back to those heights based on strong earnings. But the company does have some short-term issues that may prove to keep a lid on the stock for the rest of this year, particularly since the stock may be pricing in every bit of good news.

And analysts seem to agree. The consensus 12-month price target for Nike stock is $101.78. That would be a gain of just under 3% from the company’s current price.

Unless something massively changes, Nike remains a long-term buy. One of my simple investing axioms is that good stocks don’t suddenly go bad. Nike may have a bad fourth quarter, and it may even have a lackluster first quarter, but the company is simply a juggernaut.