Consider buying On Holding (ONON) due to its strong brand momentum and projected 31% revenue growth, making it an attractive growth-at-a-reasonable-price opportunity. In contrast, legacy brand Nike (NKE) should be avoided as it faces negative sales growth, declining profitability, and a significant risk of a dividend cut. The dividend payout ratio for NKE is an unsustainable 82%, and a cut could severely impact its stock price. Investors should also be cautious with Lululemon (LULU), which is experiencing slowing growth and losing market share to trendier competitors like Aloe Yoga. This market shift suggests that nimbler brands like ONON are successfully capturing sales from established industry giants.

On Holding (ONON)

• The speaker identifies On Holding (ONON) as their favorite investment opportunity among the three stocks discussed, citing its strong growth and brand momentum.
• High Growth Rate: The company is predicted to grow its revenue at 31% over the next 12 months, which is significantly higher than Lululemon (6%) and Nike (negative growth).
• Strong Brand Trend: The brand is described as very trendy, particularly with men aged 35-50, and is even seen as a status symbol. The speaker notes that once you see the logo, you "can't unsee it" at places like airports.
• Favorable Business Model: On Holding has a high proportion of Direct-to-Consumer (DTC) sales (around 70%), which allows for much higher profit margins compared to selling through third-party retailers.
• Healthy Margins: Despite investing heavily in its rapid growth, the company maintains a healthy 14% EBITDA margin.
• Consistent Performance: Revenue growth has been very steady and smooth, consistently staying between 20% and 40% over the past year and a half.
• Attractive Valuation: On a growth-adjusted basis, the speaker believes ONON is undervalued compared to its peers, stating that the market has "sold off on" the stock for reasons they don't understand.

Takeaways

• Bullish Sentiment: The speaker is very positive about On Holding's future prospects due to its high growth, strong brand, and efficient business model.
• Growth at a Reasonable Price: The stock appears to be a strong growth play that may be undervalued relative to its growth rate, presenting a potential buying opportunity.
• Market Share Capture: On Holding, along with Hoka, is actively taking market share from legacy brands like Nike, indicating a significant shift in the athletic footwear market.
• Potential Catalysts: Future growth could be boosted by major sporting events like the Olympics and the World Cup, which increase general interest in sports apparel.

Lululemon (LULU)

• The speaker expresses a bearish or cautious view on Lululemon (LULU), primarily due to slowing growth and intense competition.
• Slowing Growth: Growth is projected to be only 6% over the next 12 months. Store revenue growth is just 3%, and digital revenue growth is 9%, which is considered slow for a supposedly trendy online brand.
• Losing "Trendiness": The speaker believes Lululemon is losing its "cool" factor and market share to competitors, most notably Aloe Yoga. They observe more people wearing Aloe and believe the target consumer now prefers to spend $130 on Aloe leggings over Lululemon.
• Intense Competition: The market for premium leggings is crowded. Besides Aloe, Lululemon faces competition from brands like Athleta and Fabletics.
• Threat from Low-Cost Alternatives: The speaker highlights the threat from extremely cheap online alternatives on platforms like Amazon and Shein, where similar-looking leggings can be purchased for as little as $5.59. This makes Lululemon's $100+ price point difficult to justify for some consumers.
• Weak "Moat": The speaker questions Lululemon's competitive advantage (its "moat"), suggesting that if the brand is the only moat, it appears to be weakening as other brands like On Holding are now also making yoga pants.

Takeaways

• Bearish Sentiment: The fundamental analysis is negative. The speaker "would not necessarily touch" the stock at this point due to concerns about slowing growth and eroding brand strength.
• Competition is a Major Risk: The rise of Aloe as the new trendy brand and the availability of cheap fast-fashion alternatives pose significant risks to Lululemon's sales and pricing power.
• Monitor Sales Trends: Investors should watch for a turnaround in sales growth. If Lululemon cannot regain its trendiness and accelerate revenue, the stock may continue to underperform. The stock was already down 55% in a year at the time of the podcast, which the speaker felt was justified.

Nike (NKE)

• The speaker is highly bearish on Nike (NKE), viewing it as a "destroyer of capital" with a deteriorating financial outlook.
• Negative Growth: Analysts expect Nike's sales to drop by 1.44% in the coming year. This is a major red flag, especially when newer brands like On are growing at over 30%.
• Declining Profitability: Adjusted EBITDA (a proxy for cash flow) dropped 41% over the past 12 months and is predicted to fall another 10%.
• Significant Stock Price Decline: The stock has fallen from a high of $177 in late 2021 to $64, representing a massive loss for shareholders.
• Dividend Risk: While Nike is close to becoming a "dividend aristocrat" (a company that has raised its dividend for 25+ consecutive years), its dividend is at risk.
  • The payout ratio is an unsustainably high 82%, meaning 82% of its earnings are paid out as dividends.
  • With earnings and cash flow predicted to decline further, the speaker warns that Nike may have to stop raising or even cut its dividend.
  • A dividend cut is a catastrophic event for a dividend stock and could cause the share price to get "halved overnight."

Takeaways

• Strong Bearish Sentiment: The speaker sees significant fundamental problems at Nike, including negative growth, falling profits, and an unsafe dividend.
• Avoid for Now: The combination of a high valuation on a growth-adjusted basis and severe fundamental challenges makes Nike an unattractive investment.
• Dividend is Not Safe: Investors who own Nike for its dividend should be aware of the high payout ratio and declining earnings. The risk of a dividend cut is a major concern that could lead to a sharp drop in the stock price.
• Losing to the Competition: Nike is a prime example of a legacy brand losing significant market share to nimbler, faster-growing competitors like On and Hoka.