Under Armour (UA, Financial) is one of the world’s most promising companies in the casual apparel and sportswear market.
The company only started supplying footwear in 2006 but has since grown to become one of the leading players in the industry. Under Armour has also been one of the few players that have been able to challenge Nike’s (NKE, Financial) and Adidas’ (ADDYY, Financial) leadership in the sporting goods market.
Over the last few quarters, shares of Under Armour have experienced volatile conditions as investors continue to demonstrate their divided opinion on the company’s valuation metrics. Despite Under Armour’s underdog status when compared to industry giants like Nike and Adidas, the company has high valuation multiples that have potentially led some investors to believe the stock could be overvalued.
For instance, Under Armour had a P/E ratio of 69.79x which compares inferiorly (investmentwise) to Nike’s 25.92x. On the other hand, Adidas' P/E ratio stands at 29.79x while Under Armour’s smaller Oregon-based rival Columbus Sportswear (COLM, Financial) trades at a discount 20.86x in P/E ratio. Under Armour's P/S ratio of 7.84x also indicates that it is significantly overvalued when compared to rival Nike’s 2.98x.
Nonetheless, some investors appear to be convinced that the stock could be about to conjure another rebound after hitting a critical support level of about $36 per share. So what could be driving their positive views on the stock given its seemingly expensive valuation?
Under Armour has been one of the best growth stocks in the industry, and this appears set to continue for the foreseeable future.
In the most recent quarter, the company posted its 24th successive quarterly revenue growth rate of more than 20%. This triggered more optimism from investors, and they managed to rally the company’s stock price by 7% on the day following its earnings call.
Under Armour is also looking to brush shoulders with the biggest rivals in the industry by booking key athletes to promote its brands. The company has already locked up Washington Nationals’ star Bryce Harper to a multiyear sponsorship extension following its most recent quarter results.
Just to illustrate how effective this could be on a marketing front, the company’s basketball face Steph Curry was recently added to Time magazine's list of top 100 most influential people.
Nonetheless, for the cautious investors, it’s good to point out potential drawbacks to the company’s growth prospects.
Under Armour’s chief digital and chief merchandising officers left the company in the last quarter, which immediately puts the people to take over these positions in the spotlight.
After the announcement of the departure of key executives, the market gave up its prior gains and since the initial earnings pop, the stock has been down to 21% over the last four weeks.
In addition, while Under Armour’s revenue has managed to grow by more than 20% over the last 24 quarters, the growth rate could soon be put under pressure as inventories continue to pile up. In the first quarter, Under Armour’s inventory increased by 44% while revenue rose by 30%.
With inventory levels constantly rising more than sales, it is purely a negative sign as it opens the business up for future markdowns. Higher levels of inventory also have a negative effect on gross margins, which means that profitability could be under threat too.
Now, from an aggressive investor’s point of view, the stock could yet present an opportunity to buy. If you take a look at Under Armour's stock, it has been on a downward trend over the last few weeks, bar the recent rebound which seems to be setting it up for another run.
The company’s stock fell from a high of $47.94 per share to the current level of about $36 per share. This indicates that there is massive potential for upside despite the contradicting view depicted by the company’s valuation metrics.
Conclusion
In summary, shares of Under Armour have been volatile over the last few months, and this means that the recent plunge, which now seems to have taken the stock price to another critical support level, may not be indicative of Under Armour’s short-term direction.
In addition, the company continues to enjoy massive top line growth rates, which indicate that Under Armour still has the potential to grow further albeit a small hurdle in the form of ballooning inventories.
The bottom line is that Under Armour’s stock price has fallen significantly in the recent past and now it appears to be bottoming at around the $36 level, in which case it could rally back upward.
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