Best Stock to Buy Right Now: Nike vs. On Holding
Nike (NYSE: NKE) has dominated the sportswear market for more than a generation, but its leadership position isn't as strong as it once was. The company has posted anemic growth for the last several quarters and warned that revenue could decline in fiscal 2025 as it struggles, like many of its consumer discretionary peers, with weak consumer demand.
As a result, the stock is now trading near a five-year low, and losing market share to upstart competitors like On Holding (NYSE: ONON), Deckers' Hoka brand, and Lululemon Athletica, among others. On has attracted a lot of attention from investors, but growth and valuation don't tell the whole story. Let's take a look at how On and Nike stack up against each other to determine which is the better buy today.
Image source: Getty Images.
Business model: Nike vs. On
As they compete in the same industry, Nike and On have similar business models, though On is a much younger company than Nike, founded in 2010, compared to Nike, which dates back to the 1960s. On is also based in Switzerland, while Nike is American.
Historically, Nike's business has relied on wholesale partners like department stores and sneaker retailers like Foot Locker. However, the company has prioritized building its direct-to-consumer business, which brought in $21.5 billion in revenue compared to $27.8 billion in the wholesale channel.
On has also emphasized direct-to-consumer sales and brought in 37.5% of revenue through the DTC channel.
Nike has been a master of traditional marketing tactics, with a roster of sponsors that includes some of the greatest athletes of the last 50 years, including Michael Jordan, LeBron James, Serena Williams, and Tiger Woods, and it's known for its "Just Do It" motto and ubiquitous logo. Nike's strengths include basketball, running, cross-training, and streetwear.
On has focused on running, and earned a reputation for innovation with its CloudTec cushioning technology. On has also favored social media and influencer marketing, and it's focused on individual preferences that it can tailor through its website and stores. In that sense, On's growth resembles that of Lululemon when it was a smaller company.
Growth potential: Nike vs. On
On is significantly outgrowing Nike at the moment, though it is much smaller than the industry leader with roughly $2 billion in annual revenue, compared to Nike with more than $50 billion.
On is primarily competing in the running shoe market although it's expanding to new categories like tennis and cross-training. In October 2023, On announced its intention to double full-year sales from 2023 to 2026, implying a 26% compound annual growth rate for that period. It's also targeting an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 18%.
Nike, on the other hand, is much more mature and its growth is likely dependent on growth in the overall industry and an uptick in consumer demand. Nike has experimented with acquisitions, but the vast majority of its growth has been organic. The company is moderating production in 2024 as it adjusts to the slowdown in demand.
Valuation: Nike vs. On
Nike's price has fallen by roughly 60% from its peak and it now trades at a price-to-earnings ratio of 20. On, on the other hand, is more expensive, trading at a price-to-earnings ratio of 89, reflecting its stronger growth rate and expectations that it will gain more market share in the athletic apparel industry.
Who's the winner?
Based on the current numbers and trajectory, On looks like the better buy here. Nike faces significant challenges and it's unclear when it will return to steady revenue growth. While the company should eventually get there, the stock isn't cheap enough to buy as a value stock, and investors would be better off waiting for clearer signs that the business is rebounding.
On also has strong profit margins, especially for a growth stock, and has executed on its recent goals. It's the better buy of the two companies today.
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Jeremy Bowman has positions in Nike. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends On Holding and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
