Is Nike Stock Undervalued Right Now?

When a stock that's done well for a long time slumps, investors sometimes get tempted to jump in. But the market has sent the price down for a reason. That's why investors should look deeper into the company.

Nike (NYSE: NKE) rewarded shareholders for a long time. But that hasn't been the case for awhile. The share price has been on a downward trajectory for the last five years.

Is the company poised for a turnaround, making this a value stock and an opportunity for outsize gains? Or do more challenges lie ahead?

Image source: Getty Images.

Rough going

It's not an exaggeration to say that Nike lost its way. Once a revered brand with high-profile athletic endorsements and popular footwear and apparel products, the company's sales have been hurt by management missteps and intensifying competition.

Management tried to lean more heavily on its direct-to-consumer business, but this alienated its wholesale partners. That's a recoverable mistake, but the company had a bigger issue. Nike's lack of new and innovative products hurt the company's reputation and allowed competitors, including Adidas, On Holding, and Deckers Outdoors' Hoka brand, to take market share.

It's not easy to win back customers once the brand becomes tarnished. But Nike hired Elliott Hill as CEO back in October 2024. Investors and industry veterans applauded the move to bring back Hill, who held executive positions at Nike before retiring in 2020.

He's tried to reverse the sales slide, including refocusing on sports, once a core area of strength for Nike. However, the company's top-line growth has yet to materialize.

The company's fiscal third-quarter revenue was flat year over year. However, foreign-currency translations boosted the figure. When removing those effects, revenue fell 3% year over year. The period ended on Feb. 28.

Value stock or value trap?

Nike's share price has dropped nearly 65% over the last five years, through June 19. That badly trailed the S&P 500's (SNPINDEX: ^GSPC) 80% gain.

The price-to-earnings (P/E) ratio, a traditional valuation measure, dropped from 36 to 30. That's below the stock's 10-year median of 33, but only slightly below the S&P 500's P/E ratio of 32.

With sales growth yet to be revitalized and the challenges management faces, the shares don't appear attractively valued. Given that, this has the makings of a value trap. I'd avoid Nike's shares for now until you see evidence that the company can win back customers and reverse the sales slide.

Lawrence Rothman, CFA 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.