Under Armour Inc. (UA, Financial) has been growing at a breakneck pace for several years. The company has been reporting 20% annual growth consistently, which is why the market put a massive premium on the stock. Growth companies tend to command a premium over their mature peers, but whenever they fail to meet market expectations, the stock crashes.
Under Armour is no exception to this trend. After reporting consistent 20%-plus growth for several years, the company guided for a growth of just 12%, which saw shares tank close to 30% in one trading session.
With the stock trading at multiyear lows, investors may be tempted to call out a bottom. I think that may be a risky option, however, especially since the market is already at all-time highs.
Under Armour’s growth in the U.S., which is still its core market, slowed down to just 6% in the latest reported quarter, which is another red flag. Granted, the company’s international sales are expected to grow at a much higher rate going forward, but the saturation of its core market may mean its days of over 20% annual growth are behind it.
A slowdown in growth in inevitable and there is nothing bad about it. In the case of Under Armour, however, the slowdown is coupled with a high valuation, which makes it difficult to own the stock at current levels.
Despite Under Armour dropping 30% post-earnings and is now down considerably from its all-time highs, the stock is still trading at 40 times trailing earnings. No matter what, justifying a trailing earnings multiple of 40 times with annual growth of just 12% is not possible. Currently, the market is putting a massive premium on the company’s ability to continue growing in the international market. With much of the expected international growth priced in already, I do not think the risk-reward is favorable for Under Armour longs.
Conclusion
Owning Under Armour at current levels is clearly a risky bet. The market is already pricing in much of its international growth. The company will find it difficult to grow into its current valuation, let alone break through it. Despite the fact the company's growth is declining rapidly in its core market, I think Under Armour is still overvalued. All things considered, I think investors should consider selling the stock at current levels.
Disclosure: No position.
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