LULU

Forget Nike: Buy This Magnificent Growth Stock Instead

As one of the world's most recognized brands, Nike (NYSE: NKE) is a name that is all too familiar with consumers and investors alike. The business has come to dominate the athletic apparel and footwear industries, generating $51.6 billion in trailing-12-month revenue and sporting a market capitalization of $143 billion.

However, this consumer-discretionary stock hasn't made for a smart investment. Its shares are down 30% in the past three years compared to a 19% gain in the S&P 500. If you want to buy Nike on the dip, think again. You should seriously consider buying this magnificent growth stock instead.

Look out for Lululemon

Between fiscal 2018 and fiscal 2023, this company reported revenue and earnings per share (EPS) growth of 24% and 28%, respectively. It competes in the same industry as Nike, but it has been posting much stronger fundamentals. I'm talking about Lululemon Athletica (NASDAQ: LULU).

Lululemon's ongoing success highlights how much Nike has been struggling. The Oregon-based enterprise, known for its incredible marketing and branding prowess, saw sales increase by only 1% in the latest fiscal quarter (Q3 2024 ended Feb. 29). Management expects a 1% revenue jump for the full year.

Matt Friend, Nike's CFO, called out the "uneven macro environment" on the earnings call. This explains the near-term trends. But zooming out a bit, it's alarming to note that Nike is falling short of its long-term financial targets that were introduced almost three years ago. Maybe this is a sign that the company's dominant position is slowly fading.

Fashion is a very difficult niche to find lasting success in. Consumer preferences are constantly shifting, which moves the goal posts for executive teams. Even more challenging is finding ways of maintaining a brand's relevance, whether that's with consistent product innovation and/or effective marketing. Lululemon has done a wonderful job in this regard.

It has developed into a premium apparel enterprise for both women and men. Lululemon regularly reports higher gross and operating margins than Nike does. And it's still seeing robust demand in this higher-rate and inflationary environment.

Lululemon is also much smaller than Nike, resulting in much greater long-term growth potential. Nike generates more than half of its revenue outside North America, while Lululemon makes 79% of its sales in the so-called Americas segment. This creates a lot of untapped potential, primarily in China, where Lululemon currently has 127 stores.

Take advantage of the dip

Shares of Lululemon have been a huge winner. They're up 103% in the past five years and 582% in the past decade. But the stock took a hit following its Q4 2023 earnings release in late March. Since then, shares have fallen 26%.

Lululemon beat analyst estimates on the top and bottom lines in the fiscal 2023's fourth quarter. In fact, revenue soared 16% year over year. I guess Wall Street wasn't happy with management's guidance of 11% to 12% sales growth for fiscal 2024, which is still encouraging.

Nonetheless, the company is still registering strong momentum. And over the next three years, Lululemon's sales (10.9% annualized) and diluted EPS (11.8% annualized) are forecast to rise at faster clips than Nike's key metrics.

This means there's a rare buying opportunity here. What's really striking is the slight valuation mismatch. Lululemon shares trade at a forward price-to-earnings ratio of 24.9, while Nike's sell for a 25.5 multiple. You'd expect Lululemon to be much more expensive.

On the one hand, I can understand that some investors view Nike as the safer investment. That's because it has a much longer operating history, its brand is stronger, and it has a bigger presence in the footwear category.

But it's hard for me to ignore the pitch that the market is throwing right now. Based on its cheaper valuation and significantly better growth prospects, investors should be buying Lululemon stock hand over fist.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for two decades, Motley Fool Stock Advisor, has more than tripled the market.*

They just revealed what they believe are the 10 best stocks for investors to buy right now… and Lululemon Athletica made the list -- but there are 9 other stocks you may be overlooking.

See the 10 stocks

*Stock Advisor returns as of April 22, 2024

Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica and Nike. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Tags

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for the TradeTalks newsletter to receive your weekly dose of trading news, trends and education. Delivered Wednesdays.