We can debate the value of slashing your PT $40 after it’s already off $30, but I guess that wouldn’t be fair. Also, I find it strange that they are still forecasting revenue growth of 20% for 5 years but slashing their price target so much. I don’t have a long list of stocks on my radar with 20% revenue growth but I’m always looking for them. Please fire away Morgan Stanley.
MS sights a decrease in market share for UA, especially in women’s where they think the growth is at best decelerating. While I disagree with the overall market share point, I do agree women’s is not taking hold as fast as the men’s business. This is a very legitimate concern and MS is smart to point it out as it will be key to both the short term and long term bull thesis. I’d like to see more Giselle out in the marketing especially as Nike is set debut their new athletic bra line with FlyWire technology. It could be very cool.
On the other hand, MS cites that North American apparel sales could be peeking. On the men’s side, they could be, but here’s the thing, I think they’re pretty close to Nike here already, the number one player. UA passed Adidas here at home and they’re not looking back….ever. Adidas just seen $300m on James Harden and Harden promptly went into the tank this season.
Moving on to what actually matters, Europe. MS doesn’t mention this. This tells me they’re not really paying attention to the risks for growth. Adidas remains a very strong player in Europe largely on strength in soccer. UA has had little or no growth in soccer. I don’t see meaningful growth in Europe without taking share from Adidas and I don’t see that without better soccer offerings. I have to assume Kevin Plank is aware of this since he’s done a fairly good job of breaking into new markets for over a decade. But, it’s entirely possible they miss out entirely on soccer, that would be a major problem.
Also, the CFO is departing to become the CFO of Blue Apron in weeks . I found this announcement as a bit odd last year. He’s not leaving to become a CEO, same position, smaller company. The transition seems to be going well. They named a new CFO a few weeks back and both will be with the company for at least a month to help wth the transition. However, this strike me as potentially problematic. No mention by MS.
MS also points to declining ASPs for shoes as a sign of trouble. This is verging on idiotic. If you were to go to the UA website today, you would see that the new Speedform Gemini has now “dropped”, as the kids like to say. The selling price is $129.99, the same price the original version debuted at last year.
In a shocking move, Under Armour dropped the price of the original Speedform Gemini weeks before the new one hit as well as other models that are set to refresh. No one has ever discounted the previous version of a product when the new one is about to hit in any industry before. This is sarcasm. This is also why margins will be lower, more shoes mean lower margins. This should not be a surprise.
They also note that basketball is not gaining as much traction as once hoped. Ummmm, yeah, I’m going to go ahead and disagree with them there. Whenever a new version of the Curry 2 hits, you basically have a week to order it in any size that people actually wear. These shoes are showing up more and more at youth basketball games I attend. It would strike me as odd if my area is the ONLY place this is occurring. But it could be I guess.
Also absent in the MS note is the pending stock split. I have mixed feelings on this only because of the structure, the whole Class A and Class B thing. There will be a small cash distribution when this split occurs, which can be anytime and my take on this is that UA will use the new class of stock to attract athletes going forward. Notice this announcement came right around the same time they locked up Stephen Curry to a long term deal. He’s getting shares in the company, much like the same way Tom Brady did years back, only now Class A shareholders won’t be diluted. This seems rather clever to me, but I could be wrong.
So now you have your spokespeople motivated to A, not go elsewhere and B, tell all their buddies what a great deal they have with UA. Let me tell you something else from experience. There is nothing pro athletes like discussing in the locker room with each other more than what they’re doing with their money. Ok, food is probably first, but money is a close second. If Curry is a shareholder and a major spokesperson, do you think he might try to convince others to come aboard? I don’t know, maybe right?
At this point you might be thinking, Carmine, that’s great but we’ve heard about folks challenging Nike before whether it be Adidas or Reebok, it never worked out. That’s a very fair point, but I would counter that I don’t see UA overtaking Nike, certainly not anytime soon but if you believe that UA can get to 1/2 the size of Nike, that’s a four bagger from this point. I think that’s pretty likely.
Also,I don’t recall Adidas and Reebok ever having the reigning MVP in basically every major sport before and the number one golfer in the world at any one time, but I could be wrong. You realize that Russel Wilson, Cam Newton and Tom Brady are all under the UA umbrella now right? I like the chances of one of them winning the Super Bowl and I think we know who the MVP is.
Guess what else is this year? Oh, the Olympics. Do you think their might be some hype around Michael Phelps? Yeah, guess who he endorses. I’d also bet $1 that someone we’ve yet to hear of becomes a huge story this summer and is already UA sponsored. But we’ll see.
That brings us to PE. Have you ever invested in something based on PE and tripled your money? I’d love to hear an example(s) of something that was trading at a 15 multiple that tripled within 3 years. I’m all ears. Apple and Gilead were “cheap” at 133 and 120 respectively based on PE, they’re both down like 30% now too. So spare me.
UA has guided to over $7.5 Billion in sales in 2018. Assuming they meet this, and they’ve never missed on their own guidance, that’s about 2x sales at today’s valuation. MS expects 20% revenue growth for the next 5 years despite their concerns. So in two years I’m going to be holding a company that sells for 2x sales and is growing revenues at 20%. I hope I have this problem with all my stocks.
If you’re looking for a winner for the next 6 months, UA is probably not for you, I have no problem saying that. But I do know I’ll never know exactly when the momentum will shift. I just know when moves seem silly in both directions. Closer to 100 I was a holder and seller of some, down here I’m a holder and buyer of some. We’ll see if the story actually changes and not just numbers in an spreadsheet.