The Fashion Brand For The Metaverse

While a lot of people are talking about Meta Platforms (FB), Roblox (RBLX), and Nvidia (NVDA), hardly anyone is mentioning Nike (NKE)

Its acquisition of RTFKT Studios last December made them instant players in Web 3.0, NFTs, and the metaverse. 

What is a shoe and apparel maker doing by buying a digital studio?

Some experts believe we’ll be spending more time in the metaverse, and that our attire in Web 3.0 will be just as important as what we wear in real life. 

I know it sounds crazy, but signing a basketball player and developing their own signature line also sounded crazy in 1984. 

But the world of fashion changed forever when the Nike Air Jordan’s were released. 

Could they do it again?

History has proven not to bet against NKE, check out what makes them such an attractive stock at these levels.  

The company is by far and away the most searched footwear and accessory company amongst financial pros.

And after the company beat earnings expectations two weeks ago, searches naturally spiked. But, folks kept searching for the stock afterwards, leading us to believe there might be some renewed interest in the stock.

Nike (NKE) Business

Founded in 1964 by Bill Bowerman, a track-and-field coach at the University of Oregon, and his former student Phil Knight, Nike has grown into a market cap of $200B+

Nike designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories across the globe. 

Its nine core categories are Nike basketball, running, football (soccer), The Jordan Brand, women’s training, sportswear, action sports, and golf. 

You can also find sales broken down in a variety of other ways below.

The company operates 145 footwear factories and over 400 apparel factories, the majority located in the U.S.

Nike is a brand leader in footwear with Michael Jordan is largely responsible for it. They signed him as a rookie and the rest is history. And even though MJ has long been retired, his legacy lives on with the Jordan Brand. 

Athletes now carrying the torch for Nike include: Giannis Antetokounmpo, Russell Wilson, Tiger Woods, Rafael Nadal, Lebron James, and Cristiano Ronaldo. 

After dominating planet earth, NKE is now ready to take over the metaverse. 

The company made a power move last December when it announced it was buying RTFKT Studios. RTFKT makes digital products, games, and NFTs for Web 3.0. They are the makers of the very popular Clone-X NFT collection, one of the highest grossing NFT projects to date.

Despite other retailers struggling in China, Nike recently said it was seeing signs of improvement in one of its growth markets.

Nike (NKE) Financials

Over the last few years Nike has made a concentrated effort to get closer to the consumer. Instead of focusing on getting its products out to more stores, the company decided to build its digital presence and go direct to consumers. 

And while it’s still early, it appears like the strategy is paying off for NKE.

It was a record year in terms of gross margin, operating income, earnings per share, and book value per share. 

Revenues have grown at 7.88% per year over the last 10 years, with operating income and EPS growing at a slightly faster pace of 9.44% and 12.49%.

Nike has strong enough financials to offer its investors a $1.16 per share annual dividend with fantastic cash flow and only $25 billion in long-term liabilities with $13.5 billion in cash.

Furthermore, NKE is in an excellent financial position, even if we were to dip into a recession. For example, NKE has a current ratio of 2.72x, which means its assets are 2.72 times its short-term liabilities. 

And with a quick-ratio at 1.85, it shows investors that cash concerns are not issued in the short-term. That’s further illustrated by its debt-to-equity ratio of 0.23%

NKE Valuation

One thing which might scare investors away from NKE is its P/E (35.3). Believe it or not, a 35.3x P/E for Nike is low when compared to its 5 year average of 45.9x. 

NKE has a 45% return on equity, which is significantly better than Deckers Outdoors (DECK) 27%, Skechers (SKX) 26%, and Steven Madden (SHOO) 23.8%

NKE has a gross profit margin of 46.2% which is less than DECK (52%), SKX (49%) and CROX (61%)…

However, it’s worth noting that NKE is operating on a significantly larger scale. For example, while CROX has a better gross profit margin, its market cap is less than $5B, while NKE is at $211B.  

The real concern here is simply that Nike’s valuation garners a premium in terms of price to sales (P/S) and price to cash flow relatie to its competitors.

Our Opinion 7/10

Nike (NKE) is the worldwide leader in footwear and sports apparel. Shares of the stock have dipped recently because of inflation fears and the threat of an economic slowdown. 

However, NKE has made great strides to improve its margins by going direct to consumers. As well as, make some big bets into the metaverse. 

It has a huge advantage in terms of brand recognition, and investors can draw comfort in that the company has endured harder times than what we’re witnessing now. 

While none of its NFT and metaverse moves have any real revenue behind it yet. But this could be an early way for the company to position itself for the future.

Lastly, Nike’s valuation is extremely rich. 

There’s nothing wrong with the company whatsoever. We’d just like to see the stock at roughly 25%-50% lower than its current levels. 

Yet, the 5-year average P/E ratio says that may not happen. So investors should make a conscious decision on the tradeoff of potentially missing the stock if they wait for lower prices.