Is Nike consolidating before a fresh rally?

Key Points

• Shares have struggled since last month's earnings report but have been consolidating for the past week. 
• Despite the negative outlook, analysts remain cautiously bullish, and the stock trades below most price targets. 
• From a valuation perspective, as well as a technical perspective, Nike also trades favorably. 

For a stock that could do nothing wrong for a long time, it's been a tough couple of months for Nike Inc. NYSE: NKE. A dodgy earnings report last month, including the dreaded weak forward guidance from management, was enough to condemn shares of the Big Swoosh to their most significant single-day drop in years. While the rest of the stock market was enjoying a bumper end to the year, Nike shares were falling back to the 2019 levels they're currently trading at. 

Despite some promising efforts, they've gone nowhere since the middle of 2022, and investors must be getting impatient. However, for those of us on the sidelines, it's an excellent time to consider if an entry opportunity may be opening up. Let's dive in. 

When a stock misses earnings expectations and warns about future performance, much of the worst-case scenario is quickly priced into the stock. It rarely happens in a single session but typically over a matter of weeks as the numbers fully digest. Then, as Wall Street's focus shifts to the next big story, interest dwindles, and the stock is left ticking over without much volume either way. 

Trading sideways

Such is the case with Nike shares, which set a temporary low last week and have traded sideways in a narrow range since. That low, around the $100 mark, need to be helped if the stock is hoping to break the current downtrend in the near term, but if Nike shares can manage to do that, then we could be looking at a decent recovery rally. 

Earlier this week, the team at Morgan Stanley flagged the potential here when they named Nike as one of their top picks for outsized returns in 2024. They see relative strength in the company's earnings revisions, which almost always precede upside performance, especially when a stock has been beaten down. Morgan Stanley isn't alone in its bullish optimism, either. While several Wall Street heavyweights struck a cautious tone in the aftermath of December's results, none went so far as to downgrade Nike stock to a full "sell" rating. 

Indeed, we mostly saw reiterations of Buy ratings, though with a tempered price target reduction. However, with Nike shares now down nearly 20% from their pre-earnings high, the stock is trading well below almost all of these refreshed price targets. 

HSBC, for example, said this week that they're now looking at $115, which suggests there's at least 15% upside from where Nike is currently trading. JPMorgan's updated price target is $128, with an upside of almost double that. 

Getting involved

So, we're inclined to think that if Nike can manage to keep consolidating, its shares will naturally turn north soon. It's still a great business with an enviable moat and good exposure to the Chinese market. The company's innovation remains a bullish driver internally, while overall quarterly revenue is at record highs. The slowing growth is a concern, but Nike has shown itself capable of pivoting in the past, and it has the track record to suggest this time will be no different. 

Sure, there are better stocks out there. Lululemon Athletica Inc. NASDAQ: LULU is arguably one of its closest competitors in the athleisure space, but on valuation grounds, Nike is far more attractive. Lululemon's price-to-earnings (PE) ratio of 60 is more than twice that of Nike's, which bolsters the argument that there's a bargain on the table here with Nike shares. 

Technically, the stock's relative strength index (RSI) is close to oversold levels, while the MACD is on the verge of a bullish crossover. Together, these indicators alone would point to an imminent upside in the stock, so watch closely and get ready to back up the truck.