NKE is a buy for long-term investors; current price provides sufficient margin of safety despite near-term business struggles.

Nike's stock has just plummeted to its lowest level in 12 years, down about 81% from its all-time high and nearly 50% this year alone. In the latest earnings call, management did something very harsh.

I basically told investors that the pain wasn't over yet , and that parts of the business would get worse before they got better.

But here's a surprise that almost no one talks about . There is an entire half of Nike that is quietly thriving at the moment. Is this finally the bottom for a legendary brand, or is it a fallen knife that continues to cut deeper?

Let's start with how devastating this collapse was. In November 2021, Nike reached its all- time high of around $180 per share. Today, at the time of recording this clip, the stock price is less than $33.

This is a drop of over 80%, and a five-year destruction of one of the most famous and trusted brands on the planet.

To illustrate the magnitude of the gap, Nike would need to rise approximately 424% from here just to return to its old historical peak. Even worse , Nike was expelled from the S&P 100 index, which includes the 100 largest American companies, after 18 years of being included.

The company has lost nearly $200 of its value since its peak. If you bought right after the $180 peak, you would have lost about 29% annually, every year for five consecutive years, turning $10,000 into less than $2,000.

Even with the dividends Nike paid out along the way, you'd still be losing more than 75%. There is a harsh lesson hidden in this graph. By mid-2024, Nike had already dropped by about 50% to around $90 per share .

Countless people have said that the price has already halved, and the worst is certainly over. But since then, the stock has fallen by another 60%. Therefore, never assume that a stock is finished falling just because it has dropped by more than 50%.

Peter Lynch has said this time and time again : just because a stock price has dropped doesn't mean it's now attractive. So, what happened in the latest earnings report that caused the stock to fall even further?

Honestly, guys, the last quarter wasn't actually a complete disaster. Yes, revenue fell by 4%, but Nike is still earning about 48 cents per share, and its profit margins have improved slightly.

But the real shock was in the expectations. Management now expects sales to decline by high single-digit percentages this year, and earnings to range between $1.15 and $1.35 per share only.

For comparison, Wall Street had hoped to achieve approximately $1.70 per share. This is a huge fall short of expectations.

To be fair, Nike is still making profits of $712 million and continues to cut costs. So, the cleaning operations are paying off. The shock was mostly related to the future. Investors were desperately hoping that Nike had finally hit rock bottom.

Instead, the message was "not yet," and that this recovery would take longer and cost more than we thought. This is precisely why the stock fell another 3.6% the very next day .

Now, here’s the most important thing to understand about Nike right now, which is the transformation I mentioned earlier. There are actually two different Nike companies that lie within one company. One is in good health, the other is suffering.

Okay, let's start with the Nike health model. It's the sports performance sector. Running is experiencing double-digit growth. The same applies to football, tennis, and golf. CEO Elliott Hill's entire plan, to refocus Nike on actual sports, is genuinely working here.

Even North America grew by 2%, with wholesale business up 9% after a previous quarter's 14% growth. Nike's sports performance business now has a revenue of approximately $16 billion annually and continues to grow.

If we exclude the Chinese crisis, growth would have reached double-digit levels. Therefore, the basic sports strategy is not a failure.

But now, we come to the worse half of Nike, and that 's the real problem. Three large sections are receding sharply. First, Nike's sportswear and casual lifestyle footwear, which represent almost half of the company, has declined by double digits.

Hill admitted that Nike had created "a sea of similarity" by making so many identical shoes. In fact, Nike deliberately cut production of its popular "Dunk" shoe by almost half, which alone caused a $200 million shortfall in quarterly sales.

The solution is to divide this giant category into two smaller, more targeted groups.

Now, the second problem, the "Jordan" brand, has declined by an average percentage. Here, Nike is intentionally downsizing because it flooded the market with too many retro releases, eliminating the rarity that made Jordans special in the first place .

The third problem, China, which we will discuss in a moment, is in a state of freefall. So , the painful truth is that Nike’s struggling businesses are currently much larger than those that are recovering.

This is why the company as a whole seems to be still shrinking despite the growth and prosperity of some of its parts.

So, what does the market say now? Well, the story has quietly changed. A year ago, there was hope that we would "fix Nike". Today, the situation is more like some parts are working, but not the whole company.

Now, Hill says the comeback is ongoing, and it's happening in one sport, one city, and one country at a time. But analysts are now asking a very fair question. Why is this repair taking so long?

The administration's answer is that the first phase fixed the foundation, culture, athletic focus, and wholesale relationships, and only now do the more difficult reforms begin.

China in particular is the most worrying part. Sales there have fallen by 26%, marking the ninth consecutive quarter of decline, and management has publicly predicted that the situation will worsen this year.

Nike's share of the Chinese market has plummeted from around 27% to 16% after local brands such as " Anta" captured its share.

Nike also launched a new cost-cutting plan called " Peace," which aims to save about $2.5 billion, although most of that won't materialize until 2029 and 2030.

They were joined by luxury branding expert Alexandre Arnault of the family behind LVMH and Louis Vuitton. They added him to the board of directors.

The next big moment is Investors Day in November, when management has promised to reveal the next phase of its plan.

So , the whole discussion boils down to one thing. Is this pain temporary, or has Nike become permanently weaker than it was before? Therefore, the very obvious question to ask is: Does Nike still have a unique competitive advantage?

That's a special protective advantage over its competitors. The answer is yes, but it has definitely started to crack.

On the positive side , Nike remains one of the most recognizable brands on Earth, still generating over $40 billion in sales annually, boasting an army of top athletes, and still dominating serious sports such as running and basketball.

They currently support more than 70% of the basketball players in the American professional league. Something like this doesn't disappear overnight , but if it isn't dealt with aggressively, it could become a long-term problem that is difficult to change course.

I still feel, and I've said this in many videos , that if you asked 100 random people the name of the most popular sports brand, Nike would probably be the winning answer among them.

But here is the crack. As for shoes, there is virtually no cost to switch between brands. You can go out and buy "Hoka", "On" or "Adidas" tomorrow, without any problem. Therefore, Nike's competitive advantage only holds true if people want Nike more than other brands.

The warning signs are flashing clearly. The company's share of the Chinese market has just shrunk to almost half. It is losing young stars to rivals, such as Mbappe to Aon, Yamal to Adidas, and even the Premier League ball deal to Puma.

Even its CEO admits that their lifestyle footwear has become repetitive.

So, is Nike's defensive trench really damaged, or has it just been poorly managed for a few years? Hill is betting that the situation can be fixed . As for the market at the moment, it is not entirely certain.

But there is one promising sign: Nike's flagship store in Shanghai has been growing for 10 consecutive months using its new approach that puts sports first. Evidence that reform can succeed when implemented correctly.

So, guys, let's look at both sides, from a purely business perspective. First, the optimistic viewpoint. The first point in favor of the optimists: the shift in performance is real.

The sports businesses we've been talking about are growing at double-digit rates, and that's not just a promise. It shows in the numbers right now . If this continues to build up while the struggling parts eventually stabilize, the entire company could suddenly return to growth.

The second point in favor of the optimists: Nike is finally willing to sacrifice short-term sales for the long-term health of the brand. Scaling back Dunk, reducing Jordan Retro releases , and cleaning up its struggling sales in China are all hurting revenue today.

But scarcity and premium pricing are exactly what made Nike special in the first place , and a management team willing to take the pain to rebuild that is doing the right thing in the long run.

The third point in favor of the optimists is that there are clear, real gains. North America is growing. And wholesale partners are returning. Profit margins have increased , costs have decreased , and new products such as Vomero, the Studio Fleece line, and Caitlin Clark's all-new shoe are real successes.

This is not just talk, guys. Some of them are clearly successful.

But of course, pessimists have strong counter-arguments . The first point in favor of the pessimists is that China, the company's largest country in the world, may not experience a temporary recession at all.

It could be permanent damage. If Nike cannot win back China, once one of its most profitable markets, its long-term earning potential may be permanently less than investors had hoped .

One report even predicts that Nike's market share in China could slip to around 11% by the end of next year.

The second point in favor of the pessimists is that Nike's largest businesses are still the most affected. Yes , performance is growing, but the two largest sectors, sportswear and Jordan, are still in a state of contraction.

After nearly two years of transformation efforts, the three biggest problems are still the three biggest problems. This is the harshest criticism directed at the administration.

The third point in favor of the pessimists is that the competitors are attacking from all directions. It's no longer just about "Adidas" . There is an "on" sign. There is a "hoka".

There is a "Puma ". There are also hungry Chinese brands like " Anta", all competing for customers and star athletes. When the star athletes we've talked about start moving to rivals, it's a sign that Nike's grip on culture may be waning.

Unlike a few years ago, there is now strong competition in almost every category.

So, folks, before we delve into Nike and my opinions about it, a reminder: don't take our headlines and thumbnails literally. We are not here to give you investment advice. We are here to teach you a process that you can one day apply to your own investments.

We hope this will help you sleep better and be less emotional . And what will happen when you sleep better at night and make less emotional decisions? We hope you will be able to earn more money.

So , let's count the numbers. What is the true value of Nike based on my assumptions? So, guys, what's the price of Nike today? It's not just about the share price. It's about market value.

It is the total outstanding shares multiplied by the share price. 48.8 billion. Let's say 50 billion for simplicity. After that, we have an institutional value of 63.7 billion.

This $15 billion difference is essentially their debt. Which, folks, based on their five-year free cash flow, is not a big deal. Because they only have 4.3 billion in free cash flow. But last year it dropped to 2.2 billion.

I have another concern: people like dividends that are close to 5%. I don't like that. Why? Because it consumes 2.4 billion of their cash flow. Guys, they didn't have 2.4 billion last year .

Therefore, they have to withdraw from their savings or borrow to pay these distributions.

Guys, my guess is that if the stock stays low and the company's turnaround takes longer, that's a possibility. The company might simply cut its dividend, saying, "Listen, they have to do one of two things with their dividend.

Use it to grow the company and buy back these cheap shares." Because based on their five- year free cash flows, this stock is selling for 10 and 11 times earnings and free cash flow.

This is very cheap when you look at the five-year average.

Okay, but we have some other good metrics here . High return on capital. Yes, the five-year average is higher than the one-year average. Why? Because it depends on operating income.

During the transition phase, their operating income is declining. So I understand this completely. But again, the five- year average is still 17%. The total profit is actually higher than it was a few years ago.

We have 43% here. And look at their profit margin. Average age is 10 years, 9 and a half. Average age is 5 years, 9 and a half. One year, 6.7. It is clear that profits and free cash flow decline during this transitional phase.

Guys, before we go any further, I want to remind everyone that this is a very controversial company . When the stock price was $180, we made videos saying that we weren't even interested in looking at it unless it dropped below $100.

What did people say? "It will never go below 100. You're crazy." Now the stock continues to decline. "You're crazy to buy Nike ." I may be, but my way of looking at it is as follows.

Do I think Nike will be around for decades to come? I think so . I would be shocked if it weren't so. So, the next question is, do I think their revenues and profits will be higher 10, 20 or 30 years from now compared to today ?

If the answer is yes, then the next final question is: Can I pay today's price that will give me a very sufficient return on my capital based on my risks and assumptions? That's what we'll find out later.

What did people say? "It will never go below 100. You're crazy." Now the stock continues to decline. "You're crazy to buy Nike". Do I think Nike will be around for decades to come?

I think so. I would be shocked if it weren't so.

So, the next question is, do I think their revenues and profits will be higher 10, 20 or 30 years from now compared to today? So, let's take a look at the eight pillars. I wonder how bad these results are.

Actually, it's not as bad as I thought. Six marks are correct, and the only two marks that are incorrect are net income and low cash flow, which is what I expected. But again, debt is low based on a 5-year average free cash flow , high returns on capital, and share buybacks, which is something they should be doing much more of .

But again, debt is low based on a 5-year average free cash flow, high returns on capital, and share buybacks, which is something they should be doing much more of.

So, let's see what the analysts think about the shift here. Guys, analysts are predicting earnings growth from $1.73 to $4.25 by May 2030. What will the stock price be at a P/E ratio of 20?

Its price will be $85. Next, revenue growth. Steady, 3.6, 3% , then a jump of 20%. There are many analysts here who predict a lot of change in the future. But again , they are analysts.

It's simply a way to look at the expectations here.

Next, revenue growth. Steady, 3.6, 3%, then a jump of 20%. There are many analysts here who predict a lot of change in the future. But again, they are analysts. It's simply a way to look at the expectations here.

The other thing is that I don't look at companies over the next 3 or 4 years . I always look at it over the course of 10, 20 or 30 years. And now, folks, I want to remind everyone, the reason I teach on YouTube is for situations like the Nike situation exactly.

People get attached to the stock price, not the story. It's very easy to do . I understand that completely. But the goal here is to sit down and say: "Where are we looking from a long-term perspective?"

The most common comment I hear on YouTube is: "I'm a long-term investor." Then I see them saying, "The stock has dropped 30% this month. It's clearly a bad company." no. That's not the case.

Every company that achieves outstanding performance experiences significant downturns. No company has ever been exempted from this. The question is: Are you a long-term or short-term thinker?

I am trying to keep this conversation going from a long-term perspective.

So, folks, we're here now and the task is to make an assumption about the future and determine the appropriate price to pay. And now, folks, just a reminder. The purpose of making good assumptions, especially with a company like Nike, is to avoid overestimating expectations.

Nike is a little more stable and it's easier for us to make assumptions, but again, it's the future. We do not know what the future holds. We may be completely wrong; we are human and we make mistakes.

That's why we want a margin of safety. So, here are the assumptions I made about Nike. First, I conducted a 10-year analysis. I assumed revenue growth of 3%, 5% and 7% for the next ten years.

This may be optimistic, especially given how bad things are at the moment. Therefore, if the company does not recover and grow in the next few years, these estimates may be too high.

Then, I set the profit margin and free cash flow at 9, 10 and 11%. The next question is: What price-to-earnings ratio and cash flow ratio would I assign to Nike 10 years from now?

Not today, and not on average over the next ten years, but at the end of the ten years.

Well, guys, I think this company has a competitive advantage. It has a high return on capital. 19% annually in the last ten years, and 17% in the last five years, a decline due to the deterioration of their business.

The average price-to-earnings ratio for companies in the S&P 500 is between 15 and 16 or 17. My question is: should I value Nike at a higher or lower price-to-earnings ratio? I think it's better than average. Therefore, I set multiples of 18, 22 and 26.

Finally, a market return of 9.5 percent with no safety margin. In other words, what is the value of Nike today based on my assumptions? This is not the price I am willing to pay. What is its value today?

So, I'm going to press the analyze button, guys. The stock is currently priced at $33 per share. I have a low price of 46, a high price of 100, and an average price of 68.

Guys, this means if I pay today's price and my low assumptions are realized, I will make 14.5 percent. If my average assumptions are correct, I will achieve 20 percent. If my high assumptions are realized, I will achieve 25 percent over the next ten years.

Remember now, this is just what the program says. Knowing that I have to be right in these assumptions.

Now think about what you just saw me do. When Nike's stock dropped to 90, many described it as cheap. Then it dropped by another 62 percent. Each one of these people had a story.

What they didn't have was a specific number. That's the difference.

I'm not here to try and guess the exact value of Nike in cents. I don't take quick opinions from television or from my chat group where my friends make fun of me for owning Nike shares.

They are literally saying that nobody wears Nike anymore. This is a ridiculous statement.

But I made my own assumptions, and I got a price. So, here's a straightforward question for you. Can you do that yourself now for the next stock you're thinking of buying? If the answer is no, then every time you buy a stock, you are doing what everyone did when Nike was priced at $90. You're just hoping.

This is precisely why we built a stock analysis tool in our community. It's the same tool I just used here. You enter the numbers. You choose the return you want, and it tells you the right price to buy.

So, the next time the price of a stock you love drops by half, you won't be wondering whether it's cheap or just cheaper. You will be able to find out.

So, what value will you gain from having clarity about the price that should be paid before buying a stock? I'm sure you'll say it's more than one dollar a day. The great news is that you can try this whole thing for $7 for 7 days. The link is located directly below this video.

The 9.5% figure tells us what Nike is worth if you want to achieve a market return, but I don't want anyone to pay fair value. I want a safety margin.

So, let's see how far Nike has to go to get a 15% return all the way down. All I'll do is come up here and change the percentage to the 15% I'm targeting. This is the return I chose for myself based on my personal situation.

Guys, I need Nike to be at $32, which is my lowest assumption, $65 in my highest assumption, and $46 in my middle assumption.

For me, this stock has a sufficient margin of safety for such a high-quality brand.

I wonder if people will say in 10 years: "Look how clear Nike was at $32 a share." It was very obvious. Well, the critics will say: "But Paul, you were buying when the price was under seventy."

You're right, I was too, and I'm adjusting the average cost in dollars downwards. This does not mean that you should do it, but I am comfortable with this decision for the next ten years.

Hey guys, we have a free and premium Nike analysis PDF, where we summarize our views and thoughts about the company. If you are interested in getting it completely free, click on the link below. You can download it in just a few seconds.

The good news, folks, is that these key metrics are there to help you understand all the numbers I've talked about; they're fully included in that free file.