Just 26% of Wall Street Analysts Rate Nike a Buy. Is It Time to Be Greedy While Others are Fearful?

In late 2024, Nike (NYSE: NKE) brought on veteran executive Elliott Hill to replace John Donahoe as CEO and execute a new turnaround strategy. Two years later, investors are still waiting for the turnaround to show progress, and the stock price has been cut by more than 50%.

Wall Street analysts have lost hope that Nike will return to its former glory. Just 11 of the 43 analysts covering the company rate the stock a buy or overweight. The median price target for the stock is below its current price as of this writing.

Sometimes the best opportunities in the market appear just as it seems everyone has given up on a company. Is it time to be greedy while others are fearful for Nike's future?

Image source: The Motley Fool.

A new turnaround plan

Hill developed the Win Now turnaround plan for Nike shortly after taking over as CEO in 2024. The focus was to improve marketing and product development while expanding distribution channels.

That focus has failed to pay off. While wholesale revenue has climbed in North America, offsetting weakness in direct sales last quarter, overall sales dropped 4% year over year last quarter. Management also forecast even bigger revenue declines through the rest of fiscal 2027. The struggle is especially profound in Greater China, where total sales dropped 26% year over year in the first quarter. China was previously a significant source of revenue growth.

To be sure, Nike's struggles in the region aren't entirely its fault. Macroeconomic headwinds have put pressure on Chinese consumers. That said, competing shoe companies On Holding and Decker Outdoor's Hoka both called out strong sales momentum in China last quarter.

That speaks to the real challenge facing Nike. Its brand strength appears to be eroding as competing companies enter the market with better products and successful marketing campaigns. It's not just footwear, either. Nike faces stiff competition from many new apparel companies using direct-to-consumer channels and marketing to gain share.

Hill's turnaround plan appears to focus on the right challenges facing Nike -- reestablishing its brand through marketing and better products -- but it's taking a lot longer than anticipated. Now the company has introduced its Pace plan, which focuses on enabling faster operational changes. As a result, Nike expects to drive $2.5 billion in cost savings, but the majority of those savings won't be delivered for two or three years.

Can Nike overcome the challenges?

The biggest question mark for investors considering picking up Nike shares at the lowest price it's traded since 2013 is whether its competitive advantage remains intact. A wonderful business can face setbacks, but as long as it maintains a wide moat, it can recover relatively quickly in the grand scheme of things.

The clearest sign of a competitive advantage is a relatively strong gross margin. Nike's gross margin expanded 60 basis points year over year last quarter, reaching 42.8%. That's well below the 45.4% gross margin it achieved a couple of years ago, but it also reflects an increase in wholesale revenue relative to direct sales.

A cause for concern, however, is that both On Holdings and Deckers Outdoor have increased their gross margins over the past decade, while Nike's has remained flat. What's more, they're producing much better gross margins. Likewise, Nike has seen a drop in its return on invested capital while its competitors have seen that metric improve, another sign of a weakening moat.

For now, it's best to wait and see about Nike stock. Investors should look for the Pace program and its cost-cutting efforts to produce better gross and operating margins while returning the company to sales growth. That will be the earliest indication that its brand strength and recent innovations are starting to resonate with customers, and that management can actually turn the business around and sustain growth for years to come.

Don't get greedy yet, but Nike could be a good stock to keep on your watch list.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Deckers Outdoor, Nike, and On Holding. The Motley Fool has a disclosure policy.