Nike stock has been one of those few businesses that is widely known by the public at large that continues to build incredible amounts of wealth for its shareholders, even as it has become globally well known and become a mega-cap stock. It’s been this bizarre wealth-building engine, forever sitting in plain sight and known by sophisticated financiers and schoolchildren alike, that has grown its profits at a rate in excess of 10% during 31 of the past 39 years.
The company’s secret? The power of Nike’s intellectual property, which has been honed through a massive advertising network of signing prominent athletes to endorsement deals across all sports and generations to advertising deals (such as Cristiano Ronaldo, Kobe Bryant, Kevin Durant, Maria Sharapova, Roger Federer, Lebron James, Derek Jeter, Rory McIlroy, Rafael Nadel, Tiger Woods, and Michael Jordan) and by simultaneously entering into exclusive sponsorships with the teams themselves at both the professional and collegiate level so that Nike gear becomes the only athletic and athleisure form of apparel that occupies the customer’s mindshare.
Nike’s strategy of paying extensive amounts for “free apparel” at the professional, college, and sometimes even high school level (such as Texas football) has enabled it to build its “engine” of nearly unstoppable double-digit growth in three ways:
First, Nike is able to create an unlimited market for its clothing and apparel because it invests in all regions, sports, and cultures. Sometimes, we take it for granted when we think that a given product can expand from, say, the Northeast United States to the South to the Midwest to the West. It takes a whole of advertising power to penetrate the “mindshare” to have customers in all markets. By sponsoring soccer in southern Texas, lacrosse in the suburbs of Maryland, baseball in Florida and California, and basketball players in New York, Nike gets to have a potential customer in every market.
Second, Nike might be one of the only businesses in the entire world that is able to create a “lifetime customer.” Nike’s method of advertising is self-reinforcing across customers of all ages. Parents wear Nike because their kids who play sports wear Nike. Or maybe they were former athletes who wore Nike themselves. Then, their siblings wear Nike as well. More than any other business, Nike has identified the “focal point” of America’s sports obsession, draped the core of their target market in free gear, and then sold its products to all the family members over and over again. It’s a peer/family/social group influence feedback loop unlike any I have ever encountered before. It is entirely possible that nowadays someone buys Nike apparel as a kid, young adult, adult, and older individual. It would not be crazy to think Nike might have customers with a half-century or longer of generating total recurring revenue for the company.
Third, this strategy results in premium pricing for the product that it does sell. To the extent we are guided by peer influence, Nike is about to convince the most “successful winners” or at least the home-town teams that a community rallies around to burnish its brand. As a result, Nike is able to earn 26% net profit on each item of apparel that it creates, in comparison to the 6.8% average for the apparel industry.
This is why the Nike shareholders get so wealthy decade after decade. It’s not some generic widget manufacturer. When a typical company generates $100 in revenue, only $6.80 is unrestricted, good, old-fashioned cash profits that can go to the shareholder. When Nike generates the same $100 in revenue, its shareholders have $26 in profit. And its profit margins have held steady for almost four decades!
I would rather own a giant block of Nike stock, leave it alone for decades, than have the access to invest in 95% of hedge funds that are in existence. The dramatic additional wealth that I expect Nike stock will produce over the long term is too extreme to ignore.
The best part? It requires no particularly specialized skill to access Nike stock and buy it every month as you go through life. Right now, you only need $50 per month to go over to Computershare and initiate a direct stock purchase plan with Nike. Since it comes with a $2 per share monthly fee for purchase, I’d prefer to put at least $250+ into Nike stock to diffuse the effect of the ongoing fees, but still, the purchasing fee would be tolerable if I planned to scale up my contribution to Nike stock over time.
This direct stock purchase plan has been in existence since 1995. What would have happened if an investor decided to put $250 per month into Nike stock every month since then? It would have compounded at a rate of 18.3% in aggregate and turned $72,000 in total contributions over a quarter century of time into $1,265,032.86 in final net worth.
It’s not like this was an incredible secret, either. Back in 1995, Nike was the largest apparel company in the world and it was paying Michael Jordan obscene amounts of money to endorse its brand. Fast forward a couple decades, it is still the largest apparel company in the world and now it is paying Lebron James obscene amounts of money to endorse its brand.
And the funny thing is? Nothing has really changed. Analysts expect Nike stock to grow profits at 13-15% annually over the next five years, a rate greatly outpacing the market as a whole. The core strategy remains intact of showering winning athletes with free swag and the rest of the world follows and buys its products. If anything, there is an argument that Nike is actually getting stronger, as it is seeking to cut out its reliance on middlemen distributors like Dick’s Sporting Goods and sell directly to its customers either online or through a Nike store.
Investors worry about its seemingly high valuation, which is a fair concern because the initial purchase price for a stock does serve as a “permanent point of reference” for calculating future returns, but paying a slight premium for a business that has the highest probability of double-digit earnings per share growth in its class has often been a decision that is accompanied with a rich reward.
This is why I pound down acquiring ownership in great businesses through common stock ownership on this site. Someone can go onto Schwab.com, establish an account for free, pay $4.95 for a trade, and buy a block of Nike stock, and suddenly, he has an asset compounding on his family’s balance sheet at a double-digit rate. For those who are serious about receiving the rewards that a unique business like Nike has to offer, a simple visit to Computershare.com to set up an ongoing monthly purchase would enable an investor to acquire more and more shares of one of the best businesses in the entire world each month.