Down 57%, Is Nike Stock a Buy in 2026?

It may be hard to believe it now, but there was a time when Nike (NYSE: NKE) was a Wall Street darling. From its IPO in 1980 to its peak in late 2021, the company created boatloads of investor value by establishing an aspirational sports-adjacent brand while leveraging low-cost production in China and other Asian countries. Expansion into those very same markets promised to deliver sustainable long-term growth.

Over the last four years, Nike's value proposition has steadily eroded. Its direct-to-customer pivot failed, and buyers are losing interest in many of its most important markets.

Let's dig deeper to determine if this crisis is a buying opportunity for new investors -- or a sign to stay far away.

What went wrong for Nike?

Nike's downfall arguably started in the post-COVID-19 pandemic period. The company quickly recovered from the initial dip caused by lockdowns and movement restrictions and overinvested in its direct-to-customer (DTC) online sales channels at the expense of its brick-and-mortar footprint.

The goal was to cut out the middlemen to secure better margins. And management seemed to believe that the artificially inflated stay-at-home economy would become the new normal. They turned out to be wrong.

The DTC strategy ceded shelf space to Nike's rivals, encouraging once-loyal Nike customers to take a chance on something new. The good news is that the situation seems to have stabilized in North America, with footwear sales up roughly 9% year over year to $3.54 billion in the fiscal second quarter. However, the weakness in China is stealing the show.

China: Where Western brands go to fail

One of the weaknesses of shareholder capitalism is that it can encourage corporate leaders to make decisions that boost profits (and the stock price) in the short term, while setting a company up for long-term failure. Nike's destruction of its old brick-and-mortar relationships in favor of higher-margin DTC sales is an excellent example of this. But a more damaging issue could be the company's overreliance on China.

To be fair, Nike has benefited substantially from its relationship with the world's most populous country. To this day, an estimated 18% of its footwear is made in the Asian nation (this number was likely much higher in the past). And the lower-cost manufacturing has helped cut costs and boost its margins as a public company over the last 40 years.

That said, over time, outsourced manufacturing leads to technology transfers and brand erosion. According to ABC, Nike shoes are among the most counterfeited goods in the world. And the quality of replicas had become so good that it is often difficult for professionals to tell the difference, let alone regular consumers. Quality shoe manufacturing techniques and materials have become much more diffuse, and this may have something to do with the expansive supply chains of Nike and other large brands.

image source: Getty Images.

Like many other Western brands, Nike is also losing the attention of Chinese consumers, who may naturally balk at the idea of paying a significant markup for a foreign brand made in a low-cost manufacturing center in their own country. Business Insider reports that a trend called "guochao," or patriotism, is sweeping through Chinese Gen Z consumers, who now gravitate toward home-grown brands like Anta and Li-Ning.

Nike's footwear sales in China dropped 20% in the fiscal second quarter -- capping off a jaw-dropping six consecutive quarters of decline in this once-crucial region. While management promises a turnaround, investors should expect the downward trend to continue because the core problems with brand erosion can't be solved in a realistic time frame.

Is Nike stock a buy?

Despite its stock price falling in value for four years in a row, Nike's valuation is still too expensive. With a forward price-to-earnings (P/E) multiple of 38, the stock trades at a substantial premium over the S&P 500 average estimate of 22. And this doesn't make much sense, considering the company's ongoing deterioration in China, which will be a long-term drag on growth for the foreseeable future.

Shares should be strongly avoided, because a turnaround looks unlikely.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool has a disclosure policy.