Nike stock has performed well recently after the company beat its earnings estimates last month. The stock has surged by 20% over the past two weeks, and many investors might debate whether it's time to sell their profits or invest more money. Personally, I think there's still growth up ahead for Nike.
Value drivers
Nike's top and bottom-line growth have been robust across all segments. The reopening of retail stores after lockdowns has assisted revenue immensely. Further growth is set to be experienced as the company invested heavily in digitalization during pandemic lockdowns. Digitalization and its consumer direct strategy will allow for more efficient supply chains and reach into previously untapped markets as manufacturers can now sell their products directly through main platforms.
The company's revenue increased by 19% year over year in the past quarter, while its operating margin grew by 8% and normalized net income grew by 110.24% compared to a year ago.
Of late, Nike has established a high amount of bargaining power with suppliers and pricing power with its customers. By continually improving upon this, moving forward might lead to further increases in profit margins.
Over the past decade, Nike's buyback and dividend policy has added value to shareholders' investments. After suspending its buyback program during 2020 due to pandemic concerns, the company has continued in 2021 by buying back $650 million worth of stock. Dividends worth $1.5 billion have also been paid.
Furthermore, strong EPS growth is predicted along with an impressive return on equity. Both of these metrics are indicative of future value for investors.
Valuation
In my estimation, the valuation of the stock can best be found by using the current price-earnings ratio and expected future earnings per share. Given the company's strong growth prosepcts, I highly doubt we will see multiples contraction any time in the near future.
Using the current price-earnings ratio of 44.97 and $4.31 in expected EPS for the next year according to Wall Street, we arrive at an intrinsic value estimate of $193.82 per share. Based on this estimate, investors can expect roughly 22% in upside potential over the next 12 months. Wall Street seems to have come to the same conclusion, as analysts have set a mean price target of $183.91. HSBC recently slapped a $205 price target on the stock.
Source: TipRanks
Final word
Nike stock is in a speculative space, but I think the positive reaction after the earnings news is due to the underlying value of the company. Nike is continuously improving on its high-quality business model by forming 3rd-party partnerships. Valuation metrics indicate that the stock is far from losing steam as long as the company keeps growing and investors remain optimistic.
