Both Adidas AG (ADS) and Nike Inc (NKE) find themselves in a similar position. With many global indices falling more than 10% since the start of the new year, it seems safe to say that we are currently in the midst of a market correction. Adidas and Nike have been no exemption to the general trend, seeing their stock prices fall 4.36% and 13.28% respectively. Although Adidas may appear to be coping better than most, their stock’s recent price movements should be taken in the context of its almost 25% decline since mid-August. Despite this, both companies have solid brands, strong earnings, and serious scope for future growth. Perhaps then, this correction presents investors with a rare opportunity to purchase some of the very best that the sports apparel industry has to offer. However, even now, investors must ask themselves whether Nike and Adidas are worth the money and, if so, which one presents the better opportunity.
Adidas and Nike are the biggest names in their industry, with market capitalisations of 46 billion USD and 228 billion USD respectively. However, it was not always this way. Before Nike’s founding in 1964, the big sportswear rivalry was between Adidas – named for its founder Adolf (Adi) Dassler – and Puma SE, founded by Adolf’s brother and one-time business partner Rudolf Dassler. By employing a combination of affordable pricing and clever marketing, Nike rapidly expanded and quickly ate into Puma’s market share. Now, Nike is listed by Forbes as the biggest sporting goods company in the world and its famous ‘Swoosh’ is one of the most recognisable logos of all time.
Recently, however, other companies are starting to threaten the hegemonic status of Adidas and Nike. Most prominently, Under Armour Inc is starting to make a name for itself, posing a serious threat to Adidas in US markets. However, Under Armour is far from ready to compete internationally and it is to this that Nike and Adidas have turned their attention of late. Specifically, Adidas and Nike are competing for the loyalty of China’s 415 million millennials. So far, the ride has not been a smooth one for either company. Notably, both brands were boycotted in China throughout the latter half of 2021 after they raised concerns about allegations of forced labour and poor treatment of Uyghur Muslims in the Xingjiang region. This came at a time when both companies were starting to feel the competition of new Chinese sportswear brands, most notably Anta Sports Products Ltd. Despite this, it is Nike that looks best placed to cling onto their foothold in China. Chinese consumers are showing increased desire for brands that reflect the country’s unique culture, a trend that has been dubbed ‘Guochao’, Mandarin for ‘homegrown fashion’. Nike read this trend well and, long before the Xingjiang controversy, set to work fostering a sense of loyalty amongst Chinese consumers by using the country as a testing ground for new products and shop designs as well a range of events – usually the unveiling of a new product or sponsorship. Undoubtedly, this has put Nike in an advantageous position and may account, in part, for their faster recovery in Chinese markets.
Another important aspect of both companies’ growth strategies is expansion into the digital realm. As the COVID-19 pandemic closed shops all over the world, both Adidas and Nike turned their attention to the e-commerce side of their businesses. Adidas’ e-commerce revenues rose 53% in 2020, accounting for more than 20% of the company’s sales that year. Similarly, Nike, who had already been investing in the online side of the business pre-pandemic, saw digital sales rise 84% in the tail-end of 2020 and the start of 2021. Moreover, both retailers have begun to turn their attention to the metaverse. Adidas have entered into a collaboration with Prada S.p.A. and have plans to auction a series of non-fungible tokens (NFTs) later this month. Nike, however, have taken a further step. Last month, the firm acquired creator of virtual trainers RTFKT and, in collaboration with video game developer Roblox Corp created the virtual playground ‘Nikeland’. This move prompted a wave of positive sentiment towards the brand and motivated Robert Drbul, an analyst at Guggenheim Securities, an investment bank, to name the company as Guggenheim’s “best idea” for 2022.
Although Nike have seemed to exceed Adidas in many key areas and the prices of both stocks have fallen dramatically of late, investors must be careful not to jump to assume that either is undervalued. Currently, Nike’s price to earnings (P/E) ratio stands at 37.69, considerably higher than that of Adidas (21.54) and of the industry at large (34.11). However, with earnings being impacted by the pandemic and the potential to unlock key areas of growth, both companies would seem to be, at the very least, valued correctly. Combine this with the fact that both stocks performed considerably worse than the broader market in 2021, and these numbers begin to look more reasonable. Wells Fargo analyst Kate Fitzsimmons upgraded Nike stock on Tuesday, issuing an overweight rating and a price target of 175 USD (NKE is currently trading at 144 USD). Fitzsimmons claimed that the pullback should be seen as a “rare buying opportunity” for investors, calling NKE a “best-in-class stock”.
Overall, it would seem as though Nike find itself at a significant advantage over their old adversaries. Both Nike and Adidas are quality companies and look set to continue their expansion into strategically important markets. Recently, however, it is Nike that seems to have gained an edge. The dip in the market could be seen as a great buying opportunity, but investors must be patient and understand that neither stock is radically undervalued and gains from digital and geographical expansion may not be seen for years to come.
Analyst: Alex Mortimer
Sector Head: Robert Armstrong-Jones