Dow component Nike, Inc. (NKE) reports fiscal second quarter 2021 earnings on Dec. 18, with analysts expecting a profit of $0.62 per share on $10.50 billion in revenue. If met, earnings per share (EPS) will mark a 12% profit decline compared to the same quarter in 2019. The stock rallied nearly 9% in September after Nike beat first quarter top- and bottom-line estimates by wide margins and raised full-year guidance. Even so, quarterly revenue was flat following a sharp contraction in the fiscal fourth quarter of 2020.

Key Takeaways

  • Nike's price-to-earnings (P/E) ratio has risen above 80 after a 35% year-to-date rally.
  • The company's direct and third-party digital sales have exploded in 2020.
  • Technical measurements are highly bullish ahead of this week's earnings report.

The sports apparel giant has greatly expanded e-commerce offerings in 2020 to compensate for slumping sales at brick-and-mortar retailers during the COVID-19 pandemic. Digital sales rose an impressive 82% in the last quarter, accelerating from a 75% increase in the fourth quarter of 2020. The company hopes to book 50% of all sales online in coming years, lowering its dependency on physical retailers and third-party sites like Amazon.com, Inc. (AMZN).

The loss of 2020 sports seasons also weighed on revenue earlier this year, but the relative success of NFL football this fall has greatly improved sentiment, with most investors expecting much stronger results and league play in 2021. Nike is also managing margins better, applying innovation and business discipline to increase profits. Even so, the stock is no longer cheap, with an 81.26 P/E following a 35% year-to-date return.

Wall Street consensus is nearly pristine on Nike stock despite the high valuation, with a "Strong Buy" rating based upon 26 "Buy," 2 "Hold," and 0 "Sell" recommendations. Price targets currently range from a low of $115 to a Street-high $174, while the stock opened Monday's session about $11 below the median $150 target. This humble placement should offer plenty of upside as long as the Nike growth story remains in track.

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its EPS. The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

Nike Monthly Chart (1993 – 2020)

Chart showing the share price performance of Nike, Inc. (NKE)
TradingView.com

The stock has been an outstanding performer for more than two decades. It mounted the 2008 high at $17.54 in the first quarter of 2010 and entered a channeled advance that continued into the third quarter of 2015, when buying interest fizzled out in the mid-$60s. The stock carved a broad descending triangle into the third quarter of 2017 and broke out, trapping short sellers who took exposure to this typically bearish pattern.

Bullish price action turned tail in February 2020 after lifting into the triple digits and fell more than 40% in a two-year low at $60. The subsequent recovery wave completed a round trip into the first quarter high in June, ahead of an August cup and handle breakout that is now approaching the measured move target in the $140s. As a result, the reward-to-risk profile isn't favorable for new entries right here, especially ahead of January, when tax selling pressure could trigger a reversal.

Even so, Nike stock is firing on all cylinders ahead of the report, with the on-balance volume (OBV) accumulation-distribution indicator also hitting all-time highs. While the monthly stochastic oscillator has reached an extreme level that has triggered prior reversals, it is showing no signs of crossing over into a long-term sell cycle. As a result, downside after the report or in January should be modest and provide another opportunity to get on board.  

The risk/reward ratio marks the prospective reward investors can earn for every dollar they risk on an investment. Many investors use risk/reward ratios to compare the expected returns of an investment with the amount of risk they must undertake to earn these returns.

The Bottom Line

Nike heads into Friday's earnings report just as August's cup and handle breakout approaches upside targets.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.