Nike's Premium Valuation Clashes with Deteriorating Fundamentals and Turnaround Risks

What happened

A recent Zacks article questions Nike's stock as expensive despite uneven demand and margin pressure, aligning with the DeepValue report's 'WAIT' stance. Nike's FY25-26 strategic reset has led to flat revenue, EBIT margin compression to 8.2%, and free cash flow down ~50%, exacerbated by ~$1.5B in tariff costs and inventory clearance. Valuation remains high at ~36x P/E and ~21x EV/EBITDA, trading at roughly double the conservative DCF estimate despite a 20% stock decline over 12 months. Brand erosion is evident, with surveys showing mind-share loss to competitors like Adidas and Hoka among younger consumers, threatening long-term moat durability. The market prices in a successful multi-year turnaround, but without clear evidence of margin recovery or brand stabilization, this optimism appears misplaced.

Implication

Near-term, the stock's premium multiple implies high expectations for a recovery that may not materialize quickly, given tariff pressures and promotional activity. Monitoring gross margin trends and brand metrics is essential, as any further deterioration could trigger a valuation reset closer to intrinsic value. Patient investors should wait for a lower price or clearer signs of margin improvement, such as EBIT moving back into low-teens and ROIC trending upward. Aggressive allocations now risk capital loss if the turnaround stumbles, especially with competition intensifying and youth preferences shifting. A prudent strategy involves watching for catalysts like inventory normalization or tariff relief before considering entry, focusing on risk-adjusted returns.

Thesis delta

No significant shift is required, as the DeepValue report's 'WAIT' judgment is reinforced by the news article's valuation concerns. The thesis remains that Nike's quality franchise is overshadowed by expensive pricing and deteriorating fundamentals, advising patience until either valuation corrects or turnaround success becomes evident.