Just Buy It: Nike Stock has the Legs to Remain a Long-Term Winner

Nike (NYSE:NKE) stock has rallied 43% over the last 12 months brushing aside the competition and the pandemic to reach new high after new high.

Now a $215 billion company, some investors are wondering if Nike has the stamina to maintain its dominance in the global athletic footwear and apparel market. The answer: a resounding yes!

Here we explore what drives the growth engine that is Nike—and why the current decade looks as promising as Nike's last five decades.

What are Nike's Growth Expectations?

Last fiscal year, with physical retail locations closed for much of the year and consumers hampered by a tough employment environment, Nike's earnings fell 36%. But while Nike may have lost the sprint, it always wins the marathon.

Earnings are forecast to soar 78% in the current fiscal year off a weak base and then charge an additional 28% higher in fiscal 2022. Last quarter Nike swung back into profit territory and handily beat expectations.

While the dividend isn't the main reason to invest in Nike, the stock does pay a small dividend that has increased for 19 years running. Nike understandably reinvests most of its cash in growth opportunities but does payout roughly 44% of profits as dividends.

What are Nike's Competitive Advantages?

Nike has consistently outrun its competition by offering consumers a continual wave of innovative products and new ways to obtain them. Going forward Nike will continue to assert its leadership position by changing with the times.

For starters, Nike is building off accelerated online shopping trends that were born out of the pandemic. Digital sales are on the rise globally especially in the EMEA region where they tripled last quarter. Increased consumer awareness of and access to the NIKE Direct digital channels should drive strong growth for years to come. China, where the Nike name is highly valued among consumers, will be a key growth catalyst and drive international market share gains.

Whether its traditional retail or online, consumers clamor to buy Nike products because of their superior design and quality. Putting image aside, people like comfort and Nike provides it. And with many of us spending more time than ever at home these days, being comfortable seems to be trumping style when it comes to buying Nike gear.

Nike's increasing focus and presence in the women's apparel market is also helping it distance itself from peers. Many women today are leading a fast-paced lifestyle balancing career and family demands. They are increasingly shunning dressy apparel in favor of casual, yet stylish clothes that can fit multiple occasions. Nike's spending in the women's category is paying off and drives a big-time growth opportunity.

And of course, the Nike brand itself is a major competitive advantage. Despite basketball legend Michael Jordan retiring (for good) in 2003, the Air Jordan brand is as strong as ever. Meanwhile, an ever-growing list of endorsements from the world's most recognized professional athletes continues to strengthen Nike's perceived value in the marketplace.

Is Nike Stock a Buy Ahead of Earnings?

Nike will be reporting second-quarter earnings this Friday. The analyst consensus for earnings per share is $0.62 (on revenues of $10.6 billion) which represents an 11% year-over-year decline.

Management's guidance has been rather cautious given the hard to predict consumer environment and analysts' forecasts have been rather dispersed.

But one thing analysts can agree on is Nike's ongoing investment merits. The last 27 sell-side firms to chime in on Nike have all given the stock a buy rating. That's a remarkable trend.

Earlier this week UBS bumped its target price to $167, not to be outdone by Key Banc which last week issued a Street high $174 target. Investors could very well be in for an EPS beat of similar magnitude to what we saw in Q1. We could also see Nike's share price run-up this week in anticipation of better than expected first-half results—and a sizzling second half ahead.   

Although there may not be a ton of upside compared to other large-cap growth stocks, 1) there's a good chance we'll see analysts hike their price targets following this week's report, and 2) Nike stock doesn't carry a lot of risk either. In fact, its in the bottom quartile of S&P 500 stocks when it comes to volatility. This gives the stock a favorable risk-reward profile.

Looking for more evidence that the next wave of growth is just underway at Nike? Hedge funds have been piling into the stock. In Q3, despite Nike trading around an all-time high, hedge funds boosted their holdings to more than 15 million shares marking the highest level of hedge fund ownership in years.

Nike stock is far from cheap at 6x sales and 49x forward earnings. Yet its hard to argue with the valuation given the company's impeccable track record and growth prospects.

So, if you are a Nike sprinter, i.e., a short-term investor looking to make a quick buck on Nike's upcoming report, there's a good chance the stock pops Friday morning. And if distance running is more your thing, now is as good a time as ever to jump in on a clear winner. Whether this week or next year, ''just do it'', and get some Nike into your portfolio.