Nike just flashed a strong buy ahead of earnings

Key Points

• Shares are continuing to recover from last year's sell-off. 
• A dividend raise last month points to high management confidence.
• Two big rating upgrades in the past week suggest Nike's earnings could land a huge surprise. 

With its shares still recovering from a brutal Q3 sell-off, not to mention that of 2022, analysts have been coming out strong on Nike Inc NYSE: NKE ahead of its earnings later this month. Rating a stock a buy ahead of any quarterly report can be a risky business, as the market's reaction tends to be binary - a report is either judged very good or very bad, and the stock reacts as such.

So, given the volume of bullish voices starting to come out on the long side for Nike, we're inclined to go with them. The maker of the big swoosh has been rallying since the end of September, with its shares currently up 35% and trading around the $120 level. They're not a million miles away from the $130 level, which is where the bulls ran out of steam on several occasions in the past year and where a dangerous-looking double top has formed. 

The technically minded investors among us will be particularly wary of this kind of setup, for were Nike shares to once more turn back down from here, a triple top would have formed, and the downtrend would be back on. But of all the options on the table, that's one of the less likely.

Optimistic outlook

So, say the team over at Citi, at least, who on Monday upped their rating on Nike stock from Neutral to a full Buy. Analyst Paul Lejeuz and his team there called Nike a promising recovery opportunity, even amidst the challenging macroeconomic conditions. Their optimism stems primarily from Nike's ability to safeguard earnings over the next two years, driven by factors such as reduced inventory, fewer promotions, and increased direct-to-consumer sales. 

Nike is also set to showcase much-anticipated innovation ahead of the Paris Olympics while maintaining a strong presence in China, both of which should further boost Nike's unique brand and ongoing margin recovery. The Cit team gave them a fresh price target of $135, which, from where shares were trading on Tuesday, pointed to a further upside of at least 12%.

With less than ten days to go until Nike reports on December 21, this call should see shares continue to rally up through the $120s. Needless to say, if the company manages to deliver a resounding beat on analyst expectations, then the road should be cleared for the double top to be decisively broken through, and the next stage of the rally will be confirmed. 

Improving margins

Citi's stance echoes that of Goldman Sachs, who also took a favorable view on Nike shares only last week. The team there initiated coverage on Nike with a Buy rating and a $139 price target. They also see Nike's improving margins as key to the stock's potential and view the company as well-positioned to better compete as innovation strengthens. 

Goldman analyst Brooke Roach expects Nike to see an uptick in its earnings growth driven by cost recapture and improved inventory. On the revenue side, stronger growth is also expected here as Nike cycles through challenging comparisons and boosts innovation into next year. Considering that the majority of analyst revisions to expectations for Nike's revenue have been down in recent years, the potential for an upside surprise to light a fresh fire under the stock is real. There's a growing sense that even with the ongoing rally, investors could still be caught napping when it comes to Nike's potential and that last year's sell-off was totally over the top. 

The company itself raised its own dividend just last month, which is one of the most bullish steps management can take. It tells the market that it has strong confidence in its ability to continue delivering growth and that the outlook is bullish. So, all in all, while a bit risky, we're inclined to think the analysts are right to be so bullish ahead of earnings, and our readers should be getting excited.