After the Sell-Off, Is Buying Nike a Smart Move or a Missed Boat?

For a company with such a storied history, one characterized by a dominant position in the global sportswear market, Nike (NYSE: NKE) has fallen on a turbulent path.

Shares are currently trading 76% off their record (as of April 13), which was established in November 2021. Pessimism is ruling the narrative, as the business aims to fix its past mistakes and get back to its winning ways.

After the frightening sell-off, is buying this consumer discretionary stock a smart move or a missed boat?

Image source: The Motley Fool.

The bad news first

After Nike reported its financial results for the fiscal 2026 third quarter (ended Feb. 28), the share price immediately dropped 8%. This is further adding to the stock's dip this year. The market's pessimistic view is understandable. There were a few notable red flags that stood out.

Nike first entered China decades ago, and the Asian nation has been a major growth engine for the overall business. This hasn't been the case in recent times, however. Greater China, which includes mainland China, Hong Kong, and Taiwan, saw its sales drop 7% in the latest fiscal quarter. It could at least partly be blamed on competition and a weak consumer environment.

With overall company demand and revenue coming under pressure, it's no surprise that Nike's profitability has taken a hit. Net income fell 35% in the third quarter on a year-over-year basis, resulting in a net profit margin of 4.6%. Three years ago, in Q3 2023, this margin was a much better 10%.

Working on turnaround efforts isn't easy on company financials. Ongoing promotional activity, declining digital revenue, and tariffs continue to hurt earnings power.

Nike might have a leadership position in the industry, but finding lasting success in the footwear and apparel markets means the business must constantly find ways to excite consumers. It's not negotiable that product innovation must be a top priority. Observers would agree that Nike has not been on top of its game in this regard, as it leaned too heavily on classic franchises that flooded the market with inventory and lost their appeal.

This opened the door for rivals to step in and steal market share. On Holding as well as Deckers Outdoor's Hoka have been extremely popular. Both companies have grown revenues at a rapid clip, indicating robust demand. This shows that consumers like to gravitate to the hot new trend.

Here's the good part

Those rivals that have climbed the ranks, On Holding and Hoka, found tremendous success in the running category. The good news for Nike is that it's responding successfully. Running revenue was up 20% last quarter, an encouraging trend.

Despite what the data says, Nike still possesses one of the world's most recognizable brands and logos. This is a valuable trait; Nike's brand image gives it a level of pricing power that most of the industry might not have. This competitive advantage has historically benefited the business, and I believe it will keep Nike relevant far into the future.

CEO Elliott Hill, a Nike veteran who spent more than 30 years of his career at the company, also knows exactly what needs to get done to orchestrate a successful turnaround. This clarity is certainly helpful, driving the strategic direction of the business.

One area involves distribution. Nike is cozying up with wholesale partners once again, as revenue in this channel was up 5% in Q3, a positive sign. There's no perfect solution here, as the company must be able to respond to consumer behavior and meet customers where they are, including in the direct-to-consumer digital channel. But it's encouraging to know that this problem is receiving a lot of attention now.

Risk and patience

Wall Street analysts expect Nike's revenue and diluted earnings per share to be flat and fall 31%, respectively, in fiscal 2026 compared to the year before. This isn't a smooth journey. And it's clear that the path for Nike to return to steady revenue and profit growth will be a choppy one.

Only investors that can handle higher risk, and that have greater patience, should be considering buying the stock today. If Nike gets back on the right track soon, this investment could be a big winner over the next five years. But there is an extreme level of uncertainty, even though the dividend yield of 3.82% provides a nice income stream.

My perspective leans on the cautious side. While I don't worry about Nike's staying power, particularly as it relates to the brand's strength and visibility, the company's financial performance isn't giving me much of a reason to be optimistic right now. Until Nike starts to report better numbers, I'm staying away from the stock and watching from the sidelines.

Neil Patel 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.