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The annihilating market power ofNike Inc. (NYSE: NKE)? Or the enormous if uncertain potential ofFitbit Inc. (NYSE: FIT)?
Fitbit's first-mover advantage in a burgeoning market, or Nike's time-tested and perennially popular brands?
These and similar questions may challenge the investor who tries to make a call on which of these two popular corporation represents the better stock buy.
The differences in size and scope between the two are obvious. Nike's market capitalization of $93.7 billion is roughly 29 times larger than Fitbit's $3.2 billion market cap. While Nike's products span a wide range of athletic products, Fitbit focuses much more narrowly, confining itself to the wireless fitness tracker market.
Looking beyond these broad points of separation, it may help us to dive into comparable metrics to flesh out an investment thesis. The following table compares revenue, profits, liquidity, solvency, shareholder returns, and valuation between the two companies:
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|3-year annual revenue CAGR||7.9%||161.8%|
|TTM operating income||$4.5||$0.206|
|TTM operating income margin||13.9%||9.3%|
|TTM net profit||$3.8||$0.127|
|TTM operating cash flow||$3.1||$0.214|
|Debt to equity||0.17||N/A*|
|Times interest earned||237||341|
|TTM payout ratio||27.2%||N/A**|
|1-year forward P/E ratio||20.2||10.9|
Data source: company SEC Filings, Yahoo! Finance, YCharts. All dollar figures in billions.
TTM = trailing 12 months.
CAGR = compounded annual growth rate.
*Not applicable as Fitbit currently holds no long-term debt.
** Not applicable as Fitbit does not currently pay a dividend to shareholders.
Drawing initial observations
It should be apparent from the numbers that in Nike, an investor has access to an extremely stable, highly liquid, and quite profitable operation that's growing at a pretty attractive clip for a company that just recorded $32 billion in revenue over a 12-month period.
Nike boasts higher operating and profit margins, enjoys similar liquidity to Fitbit (as expressed by the current ratio) and carries a very light debt load, while Fitbit is debt-free.
Investors receive a rather middling dividend from Nike so far as yields go, but in turn, as Nike's payout ratio shows, it only utilizes an amount equal to 27% of annual net income to fund this dividend, enabling the company to maintain a firm balance sheet while it invests in its high mid-single-digit revenue growth rate. Fitbit is still in an early expansion mode, reinvesting profits into the business, so for now, it doesn't share excess cash flows with shareholders.
Fitbit's phenomenal 162% three-year compounded annual growth rate, or CAGR, which it attained by way of dominating a relatively new market which it helped create, certainly attracts investor attention. And for a company that's grabbing as much market share as possible, the fact that management has structured Fitbit to be profitable at these growth rates is a bonus for shareholders. Often, a niche pioneer will choose to run at a loss for years to expand revenue without hindrance.
Both companies recently released earnings reports that highlight their respective opportunities. In its second-quarter filing, issued on Aug. 2, Fitbit booked 46% growth in its top line. Sales of the company's new Blaze and Alta products, along with accessories, comprised 54% of this total. In a statistic that demonstrates future potential, Fitbit reported that two-thirds of Blaze and Alta activations derived from new customers.
Reporting on its fiscal 2016 fourth quarter on June 28, Nike capped a successful year by continued brisk expansion of the Jordan brand, which enjoyed 18% year-over-year growth. Similarly, the company chalked up a yearly gain of 18% in direct-to-consumer sales, which, at $7.8 billion annually, now comprise nearly one-quarter of Nike's total revenue.
Landing on an investment thesis
For the long-term investor, it's difficult not to side with Nike in this match-up. According to Forbes, Nike's total brand value of $27.5 billion in 2016 makes it not just the world's most valuable sports brand, but also the world's most valuable apparel brand, period.
If Nike continues to generate profitable "demand creation," to use a favorite phrase of its executives, it can lean on its immense brand equity and solid financial position to enjoy years of crisp growth. And future cash flows should be fairly stable, since Nike displays broad revenue diversity in its athletic-apparel portfolio, both within and outside its footwear lines.
Fitbit, conversely, operates under a revenue concentration. As much as the Blaze and Alta offerings demonstrate the company's potential, they also throw into relief the need for Fitbit's research-and-development department to innovate unrelentingly, and maintain a full pipeline of future market-leading products.
This is especially urgent given that smartwatch and other wearables manufacturers are increasingly incorporating fitness features into their products, blurring the line between smart wearables and dedicated fitness trackers.
Still, it remains difficult to ignore the potential Fitbit's growth rate shows. I draw your attention once more to the table near the top of the article. Investors' apprehension that competitors will eventually eat into Fitbit's niche has plagued the company since its IPO last summer, saddling it with a stubbornly low forward price-to-earnings multiple. Despite scintillating growth, Fitbit trades at a nearly 50% discount to Nike.
The inference? Buy Nike, but if you've got a little risk capital left over, add a smaller sliver of the "FIT" symbol to your portfolio as well.
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Asit Sharma has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nike. The Motley Fool recommends Fitbit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.