Nike’s Red-Hot Analyst Buzz: Is a Comeback Brewing?

Key Points

• Nike shares are down 60% over the past four years, but more importantly, are up 40% since April.
• A string of bullish analyst upgrades throughout the summer and the fall is hard to ignore. 
• With earnings due at the end of the month, and recent price targets calling for 60% upside, this could be the perfect comeback candidate. 

Retail giant Nike Inc. NYSE: NKE and its stock have to be one of the industry's horror stories from recent years. After soaring through the pandemic, shares have since fallen in a near-continuous slide that's wiped out more than 60% of their value, while the major indices have been printing record highs. Right now, Nike is trading just above $70 and is down nearly 10% since the end of August. For many investors, that's a chart that screams caution.

But take a closer look, and there are actually some reasons to be optimistic. Nike shares are up about 40% since April's low, and as long as that low continues to hold, the stage could well be set for a major recovery rally. Add in a continuing wave of analyst upgrades over the past few months, and the contrarian case for Nike starts to look compelling.

A Bruising Few Years

However, there's no escaping from that. Nike, which was almost trading like a red-hot tech stock, has disappointed investors in recent years.

The pandemic-era rally pushed shares into the stratosphere, but supply-chain issues, margin pressures, and waning consumer enthusiasm have sent them crashing back to earth. Just like Lululemon Athletica Inc NASDAQ: LULU, which we've been looking at this week, Nike is back where it was in 2018, a painful reminder of how far investor sentiment has soured. 

But like we've flagged with Lululemon too, there's a sense that the worst of the downside might now be priced in. From a technical perspective, Nike's price action over the summer has been a welcome change of pace from the multi-year downtrend that preceded it.

The stock bounced hard off its April low, logged a solid earnings report in July, and has been consolidating those gains since.

Analysts Turn Optimistic

There's also the fact that analysts are once more starting to line up on the bullish side. JPMorgan was flagging the upside potential as far back as July when they upgraded Nike from Neutral to Overweight. Jefferies then echoed that stance in August when they reiterated their Buy rating and added Nike to their top ideas list.

Most recently, September has brought another wave of optimism, as the team at TD Cowen upgraded its rating to a Buy just last week. They are impressed by what CEO Elliott Hill has accomplished in his first year in charge, and there are signs that the company is once again beginning to gain market share. 

The refreshed price targets are equally, if not more, important than the ratings. Across these bullish updates, analysts' targets range as high as $115. Considering that Nike closed out Tuesday at just above $70 implies a potential upside of more than 60%. If you're the kind of investor who loves a bargain, that kind of upside forecast is hard to ignore.

Fundamentals Improving Beneath the Surface

A lot depends on the company's upcoming earnings report, which is due at the end of the month. Investors and Wall Street alike will be watching for clear signs that Nike's fundamentals have not only continued to stabilize but are also starting to grow again. 

There are certainly reasons to be bullish on this front. As JPMorgan flagged last month, the company has been regaining pole position in footwear wall space, a critical retail metric that signals brand strength and consumer preference. Margins, while still pressured, appear to be finding a floor, and management has been working aggressively to clean up inventory and reset growth initiatives.

At the same time, Nike's brand remains one of the most valuable in global retail. That intangible, combined with the scale of its distribution and international footprint, means the company has more levers to pull than most struggling consumer names. For long-term investors, that brand power forms a solid backbone of any bullish thesis.

What Investors Should Know

Of course, should the company disappoint at the end of the month, things could get hairy. Nike's price-to-earnings (P/E) ratio is still relatively frothy compared to some of its peers, and that's dangerous. The fact that Lululemon's P/E ratio has sunk all the way to 11 suggests there's a lot of room for Nike to fall further should their next report not stack up to expectations. 

But the fact that the company is already back trading at 2018 levels, has a string of bullish analyst calls, and shows continued signs of fundamental stabilization means the contrarian setup is there. The key level to watch is April's low. As long as shares stay comfortably above it, the case for a sustained recovery rally remains alive.