Nike Stock Is Down 62%. Is It a Buy?

Nike (NKE -3.76%) stock plummeted to new lows following its latest earnings update. This iconic sportswear brand has suffered declining sales over the last year, which has sent the stock down 62% from its previous peak. The steady fall in the share price over the last three years might have shareholders wondering if Nike will ever return to its former glory. While sales are expected to remain soft in the near term, the stock's valuation may undervalue Nike's long-term growth potential. Recent sales trends It seemed the stock was in the process of bottoming out when Elliott Hill, who worked at Nike for over 30 years, was hired as CEO in October. However, investors can't expect the stock to rebound in a year when analysts expect Nike's sales to be down 10% for its May-ending fiscal year. Demand for Nike's products continues to look very soft. Last quarter, revenue fell 7% year over year on a constant-currency basis. Both wholesale and Nike Direct revenues were down. These declines come as rival brands, including Lululemon Athletica and On Holding, are still growing. Still, investors shouldn't associate recent sales weakness with a decline in Nike's brand power. People have a tendency to gravitate to the most ubiquitous brands, as noted by Nike's trailing-12-month revenue of $47 billion. It's a gigantic business in the sportswear industry with valuable relationships with sports apparel retailers. The recent earnings report revealed encouraging signs for Nike's comeback. Nike is back on offense One of the initiatives that Hill is implementing is to reset its approach on streetwear products like the Air Force 1 and Air Max franchises and focus more on core products that can drive more predictable sales. On this front, running shoes posted a sales increase last quarter, with strong demand for the Vomero 5 and Pegasus 41. Running goes back to Nike's roots in the early years of its growth, so healthy demand here is a positive indicator for the future. Nike is also pushing the envelope in apparel. Hill noted that its new 24.7 collection exceeded expectations, and the company is investing to expand capacity to meet demand. "We're moving with focus and urgency to get back into a rhythm of delivering across all dimensions," Hill said during the fiscal Q3 earnings call. Hill is putting Nike back on offense in terms of innovation and bringing fresh perspectives to its product strategy that can drive industry-leading growth again. Why buy the stock? The recent $65 share price is the lowest Nike has traded in more than five years. The stock's valuation still looks rich, with the forward price-to-earnings (P/E) ratio currently sitting at 31 based on Wall Street's consensus fiscal 2025 earnings estimate. Nike's average P/E over the last 20 years is 29, and it traded as low as 11 times earnings in the wake of the 2008 bear market. However, investors can get a better perspective on the value in the shares by looking ahead to Nike's earnings potential as management improves sales and reduces costs. If Nike returns to its previous peak profit margin of around 12%, this could translate to around $3.80 of earnings per share on $47 billion of annual revenue. That brings the P/E down to 17. Indeed, analysts expect Nike's earnings to reach $3.67 by fiscal 2027. With the stock also offering an above-average forward dividend yield of 2.46%, investors could see attractive returns from current share prices.