3 Reasons Nike Is a Must-Buy for Long-Term Investors

Nike (NYSE: NKE) has been a top stock to own throughout its history. However, the business has struggled in recent years, and the stock has floundered.

Under former CEO John Donahoe, the company took its eye off the ball. It prioritized technical strategies, like performance marketing and its direct-to-consumer business. However, it lost sight of long-term priorities, such as developing new products, maintaining retail relationships, and building the brand.

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The company replaced Donahoe with Elliott Hill in September. Hill, a longtime Nike veteran, came out of retirement for the job. He has held several high-level positions with the company, including overseeing products and a range of geographies.

Nike stock hasn't responded to the change in leadership yet, but the discount offers a good buying opportunity if the company can get back on track. Keep reading for three reasons Nike is a good buy for long-term investors.

Image source: Getty Images.

1. Nike's problems are fixable

In the last few years, Nike's sales growth has stalled, even turning negative as it's lost market share and profits have fallen. However, Nike's challenges are mostly due to unforced errors it should be able to resolve.

It's lost market share to smaller fast-growing brands like On Holding and Deckers' Hoka in running. However, Nike's running business returned to growth, led by the Pegasus franchise, in the second quarter, even as overall revenue fell 10%, and new products are coming down the pipeline as well.

Meanwhile, Nike continues to dominate basketball and has an unmatched roster of athletes to promote the brand and launch new signature shoes. That includes phenom Caitlin Clark, with whom Nike has yet to roll out a shoe or ad campaign.

Hill, who has worked closely with Nike's retail partners before, is working to rebuild those relationships and regain shelf space for Nike. Nike expects sales to be down for the next few quarters as it repairs the business. It's focused on scaling back on inventory and moving back to a pull model to achieve a premium brand and avoid markdowns. That playbook looks promising.

2. Sports remains a growth market

The money pouring into sports entertainment continues to grow. Athletes are signing contracts in the hundred-million-dollar range, and sports broadcasting rights continue to become more inflated.

That business reflects the end demand among audiences around the world for sports, which feeds demand for Nike products. Live sports act as an advertisement for Nike, the athletes who are its sponsors, and the game itself.

The sports entertainment business is only going to get bigger as Disney launches its flagship ESPN streaming app and Netflix finally taps into the demand for live sports. In other words, the underlying demand for the storytelling Nike's brand is associated with and its products is as strong as ever and continues to grow.

If Nike can fix the nuts-and-bolts issues with its business mentioned above, tapping into demand for sports apparel, footwear, and streetwear shouldn't be difficult.

3. The stock is cheaper than it looks

Nike's stock is now down 56% from its peak in 2021, but its valuation isn't as low as you might expect, as it trades at a price-to-earnings ratio of 25. However, there's a lot of potential growth in Nike's earnings because margins have fallen significantly, and revenue is now declining as well.

Operating income is down roughly 30% since its peak in 2021, and Nike has taken advantage of the sell-off by buying back its stock. Analysts expect the next year or two to be challenging for Nike, meaning the bar is low for a recovery.

At this point, Nike can start to engineer a recovery for the stock by just beating estimates, even if it takes a few quarters for the business to return to growth. Given its history and clear leadership in its industry, Wall Street is likely to give it the benefit of the doubt if it starts moving in the right direction.

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Jeremy Bowman has positions in Netflix, Nike, and Walt Disney. The Motley Fool has positions in and recommends Deckers Outdoor, Netflix, Nike, and Walt Disney. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.