NKE fundamentals are deteriorating (revenue/margin/FCF decline); high dividend payout ratio is unsustainable; intrinsic value is falling.

Nike's stock is among the worst performers in the S&P 500 index over the past year, having fallen by about 50%. It has also declined by more than 44% since the beginning of the year, and bets are increasing that the stock will fall by as much as 6.3 %.

That's a large number of people who are actively betting against a stock with a market capitalization of $53 billion.

But more importantly, in about 24 hours from now, Nike will release its latest earnings report, the first quarter earnings report for fiscal year 2027. And if we just look at the earnings per share forecast over the past 90 days , it's not good. Expectations continue to decline.

In fact, despite Nike's stock falling by 50% over the past year, we have seen a lot of negative news recently. For example, Bank of America downgraded Nike's rating to " underperforming the market" about a week ago.

They have lowered the target price for the stock to just $30.

Now, why did they do that? Let's take a closer look . They have lowered their earnings per share estimates for fiscal years 2027 and 2028 by 11% and 12% respectively. The brokerage firm stated that wholesale sales growth in North America was not matched by retail sales growth , with a decline in classic models and some new releases, putting order books at risk as retailers become increasingly cautious .

They also highlighted that profits increasingly depend on expanding profit margins and controlling costs, and we will return to this topic shortly.

Looking at other news, many are predicting a lot of headwinds in the first quarter, setting a very low ceiling , which again explains why we've seen so many low earnings per share forecasts in the past 90 days.

Other news, which may be positive or neutral, includes the appointment of a member of the Arnault family , which owns Louis Vuitton, to the board of directors of Nike.

So, let's talk about what to expect from Nike 's upcoming earnings report . As I said, expectations are extremely low, which can often be a ridiculously positive motivator ; As long as the stock doesn't collapse completely , we may see a rise in the stock price.

Actually, I'm not really worried about the short term. As an investor, I am interested in long-term free cash flow growth , because that is what drives dividend growth upwards.

Ironically, when we consider Nike in terms of dividend payouts, we see that its yield is now 4.6 %. 4.6%. Let's put that in simple context compared to what the yield has historically looked like .

This is the highest return per share in the past five years as well as in the last decade. In fact, historically, the return has hovered around approximately 1% . Therefore, the yield is much higher than what we have seen historically.

A dividend yield of 4.6%, along with a 10-year compound annual growth rate of 8.2%, seems very attractive at first glance, but that's where the importance lies.

What does the free cash flow distribution ratio trend look like over time? In 2024, the free cash flow distribution ratio was only 32.78%. And now, at the end of 2026, fiscal year 2026, it reached 110%.

In a period of only two years, the free cash flow distribution ratio increased from 32 or 33% to 110%. This is one of the largest increases in the free cash flow distribution ratio over two years that I have ever seen, and you can see why it happened so quickly .

First, yes, the company continued to increase the total amount it was paying out as dividends to some extent , but the free cash flow completely collapsed from 6.6 billion down to about 2.1 or 2.2 billion in 2026.

Now, the stock did not pay its last quarterly dividend for 2026, so there was no dividend cut . In fact, Nike's dividend history is very attractive, but suddenly, we're operating in very dangerous territory, and this is why.

The 5-year free cash flow decreased by 18.2%. So, suddenly, we began to see some warning signs regarding the sustainability of Nike's dividend payouts.

But when it comes to warning signs from the company as a whole, there have been some problems for a while. For example , one of the things Bank of America has highlighted again is the problems related to gross margins.

Let's talk about that here for a moment. If we turn to our profitability sheet and bring in Nike, you will see that in 2016, about a decade ago, gross profit margins were at about 46.2%, and at the end of 2026, we are at 42.9%.

Therefore, the company's overall margins have worsened. Clearly, this is not something you would ever want to see. This is usually an indication that the stock is losing its competitive advantage. It is losing its pricing power.

But here lies the real double whammy. Any time profit margins decline as revenues fall, which they have fallen markedly over the past two years, from 51.3 billion to around 46.4 billion, it will eventually lead to a rapid decline in profits and especially in free cash flow .

As we have just seen , that is exactly what happened . Those are the problems Nike is facing right now. The company is losing its competitive advantages, revenues are declining, and margins are falling.

With that in mind, could a real shift in performance occur? What do we need to look for in tomorrow's earnings report? Okay, let's start by talking about expectations for a while.

We can see that the revenue estimates are approximately $11.32 billion. Let's put that into a slightly clearer perspective . If we switch to the quarterly data tab , let's say we want to take a look at Nike and then let's look at their quarterly revenue .

What we're going to do is zoom in a little here, and you can start to see the story. Quarterly revenues are in a state of continuous decline. Now, what we're going to look at is the revenue for the first quarter of 2027.

So let's put that into perspective by looking at what first-quarter revenue has looked like in the past. We can see the first quarter of 2026 with revenues of approximately $11.7 billion.

Again, what we are seeing is that analysts are pointing estimates towards around 11.3 billion. So again , expectations are actually very low. They are expecting another year-on-year decline in quarterly revenue .

Let's look at things from the perspective of earnings per share expectations. What we can see is an average estimate of about 43 cents, and a Generally Accepted Accounting Principles (GAAP) estimate of 44 cents.

What does the stock look like historically over the past few quarters? The truth is that the numbers have been fluctuating, but we can see that in the first quarter of 2026, the price was around 49 cents.

So again, we expect a decline in profits as well. Therefore, I must point out once again that expectations are not very high. Revenue is expected to decline by approximately 3%, and earnings per share are expected to decline by approximately 10.2%.

Here's what's scary about these numbers. Yes, Nike's stock has fallen by about 50% in the past year, which usually means it is trading at a more attractive valuation. But in reality, when you look at the price-to-earnings ratio over the past five years, yes, it is at a lower multiple compared to the five-year average, but they are still at a price-to- earnings ratio of 21.45 despite the stock price being down 50%.

Why is this the case? Well, this usually happens when the stock price falls, while at the same time we also see a decline in profits. Therefore, paying approximately 21.5 times the earnings for a stock that is experiencing a concurrent decline in revenue and profits, once these two factors are taken into account, is not a good indicator.

This is why many continue to actively bet against the stock, increasing their short positions . This is also the reason that prompted Bank of America to lower its target price for the stock to just $30.

Here's what we need to look out for in tomorrow's earnings report. The most important thing I will be looking for is not the key numbers, but the future projections. Over the past few years, Nike has not been issuing long-term forecasts.

They were only issuing quarterly and short- term forecasts. And again , this is part of the reason behind the intense selling. Investors hate unpredictable future cash flows , and when a stock doesn't issue future projections, at least for a year, that's not a good thing at all.

It is a sign that management does not really know what to expect in the future.

Secondly, we need to look for improvements in gross profit margins. These margins have been gradually declining over the past decade. If we can start to see improvement, that is likely to be one of the most important indicators that the recovery plan is already starting to materialize .

However, one of the biggest weaknesses of the stock right now is the Chinese markets. In fact, one of the main reasons for the decline in revenues is what they called the Greater China market .

Bank of America noted that sales in Greater China fell by 17% in recent quarters, a significant decline.

In addition, I am very curious to see if there will be a wider discussion about capital allocation, and more specifically with regard to dividend distributions. Because, in fact, for the first time, with the exception of 2020, the free cash flow distribution ratio is alarmingly high.

So, yes, the key yield and dividend growth metrics look attractive , but if we continue to see a decline in revenue and margins, this company is really at risk of reducing dividends in the future.

I mean, a free cash flow distribution ratio of 110% is simply not sustainable.

Now , let's talk about the evaluation for a moment. Once again , let's move on to our sensitivity analysis and input the Nike data. Here we must be careful, because the truth is that we do not have much confidence in forecasts of future earnings, as the company's management does not provide guidance beyond one year, or even a quarter .

Therefore, while we see earnings per share expected to decline sharply again in 2027 according to the average analyst estimate, it is expected to recover slightly over the following years.

But what's interesting is that the 2030 earnings per share of $2.57 is still significantly lower than it was in 2024, 2023, and even 2022 and 2021. In fact, it only brings it back to levels close to 2019.

That's what's really worrying about this stock right now . This is why you may not see a significant expansion in the earnings multiple in the future.

So , even if we achieve acceptable profit growth, let's say they actually reach these expectations starting in 2027, what will future returns look like? Well, even if the price-to- earnings ratio rises to around 20, future returns are still unattractive, despite the expansion in the multiplier.

If the price-to- earnings ratio remains at its current level, then once again, future returns are not attractive. So, this stock needs more than just an expansion in its price-to-earnings ratio .

It needs real profit growth. For this reason, this is a real bet on transformation. This is not a simple situation where the stock has seen a significant drop simply because of a decline in the price-to-earnings ratio, while the company continues to achieve growth in its profits.

This company is at its lowest level in 52 weeks because it is experiencing serious problems at the moment. The intrinsic value of the stock is literally declining. So, this is what you need to keep a close eye on tomorrow.