Near a 7-Year Low, Is Nike Finally Too Cheap to Ignore?

Nike (NYSE: NKE) stock is up just a few percentage points from its seven-year low -- a low that came during the worst of the pandemic-induced sell-off in 2020 when Nike stock fell below $63 per share for one day, only to rebound 15.2% the next day.

Here's what's driving the sell-off in the footwear and apparel company and whether the dividend stock is simply too good a bargain to pass up.

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Image source: Getty Images.

Falling out of favor

Nike is a textbook example of what happens when industrywide challenges collide with self-inflicted blunders.

In 2017, Nike invested heavily in its direct-to-consumer channel, even at the expense of its wholesale relationships. The idea was to cut out the middleman and interact directly with consumers, which would theoretically give Nike more insight into buyer behavior and make promotions more effective.

The strategy was a resounding success during the peak of the pandemic, as buyers took shopping online. But over the last few years, the deterioration of those wholesale relationships and intense competition from newer brands like Deckers Outdoor-owned Hoka and On Holding led to lower sales and operating margins. Customers have more choice than ever before, and it would be a mistake to downplay just how formidable the competition has become.

NKE Revenue (TTM) data by YCharts

In other words, Nike's direct-to-consumer pivot has not been the resounding success management hoped for. To make matters worse, Nike mismanaged its inventory, which impacted its pricing power.

Consumer-facing companies must balance sales growth and profitability. If there is too little inventory, sales could be left on the table. But produce too many goods, and prices must be cut to move inventory and make room for new products. Nike's falling margins indicate pressure on the business to lower prices to appeal to strained consumers and compete with newer brands.

Turning the business around

Nike has several strategies to return to growth, such as more targeted product innovation, better supply chain management, and aligning the digital business with wholesale partners.

The company's Win Now strategy is built around returning to its roots in athletics and footwear and investing in key markets, such as Shanghai, Beijing, London, Los Angeles, and New York.

Nike is especially optimistic about China, where it feels its brand is strong and it can leverage its new product portfolio. However, the sell-off in the stock indicates investors may be losing patience with Nike and are focusing on the near-term outlook.

Nike's results and guidance for the upcoming quarter point to lower year-over-year sales. And although Nike believes the worst of its margin pressure may be over, it did identify several near-term risks that could prolong its turnaround.

Nike CFO Matthew Friend said the following on the third-quarter fiscal 2025 earnings call: "Looking ahead, we believe that the fourth quarter will reflect the largest impact from our Win Now actions, and [that] the headwinds to revenue and gross margin will begin to moderate from there. We are also navigating through several external factors that create uncertainty in the current operating environment, including geopolitical dynamics, new tariffs, volatile foreign exchange rates, and tax regulations, as well as the impact of this uncertainty and other macro factors on consumer confidence."

Turnarounds are hard enough because they involve cutting losses and realigning the business and internal processes under a new strategy. But they are even more complicated when external factors are unfavorable.

A reasonable valuation and a good dividend yield

Despite all of the negatives, there are some positives to buying Nike stock now. The biggest is its valuation.

Buying Nike for 22.4 times trailing earnings is a bargain compared to historical levels. Nike is cheaper than stodgy low-growth dividend stocks like Coca-Cola and Procter & Gamble. In the past, Nike fetched a premium valuation relative to the market.

Granted, if earnings keep falling, Nike's valuation could look more expensive in the near term. Regardless, long-term investors who are buying Nike for where it could be several years from now are getting the chance to buy the stock at a compelling price.

Nike has a 2.4% dividend yield and 23 consecutive years of boosting its payout. The dividend provides an added incentive to hold Nike through challenging periods.

A balanced long-term buy

Wall Street hates uncertainty, and Nike has given investors few reasons to be optimistic about its prospects. The company has overpromised and underdelivered too many times, so now the market is less willing to give Nike the benefit of the doubt.

The stock could continue languishing until Nike's strategic efforts translate into sales and margin improvement. Therefore, some investors may want to keep Nike on a watch list.

All told, I wouldn't say Nike is too cheap to ignore because the company has lingering problems, but the stock has also sold off so much that it's a solid buy if you believe in the resilience of Nike's brands.

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Daniel Foelber has positions in Nike. The Motley Fool has positions in and recommends Deckers Outdoor and Nike. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.