Latest / Money Grows on Trees / #366 - Dying Business Or Generational Opportunity?

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#366 - Dying Business Or Generational Opportunity? · Money Grows on Trees

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Nike stock has crashed 80% since 2021. One
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of the most recognized brands on earth is down 80%. Most
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people see that and think opportunity, but the reality is
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a famous brand and a good investment are two completely different things. And the history
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of the stock market is full of household names that never
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recovered. Question isn't whether Nike is cheap compared to
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2021. The question is really whether it's cheap compared to what it's actually worth today
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in terms of its fundamentals. I'm Lloyd J. Ross, seven-finger investor and entrepreneur.
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I help thousands of everyday Aussies, Americans, New Zealanders, Canadians, and those in
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the UK get out of debt and build real wealth. And in this video, I'm going to take you through real numbers
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behind Knight's Collapse, why billionaire investors have been buying it
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and selling it, and the framework for deciding whether this is
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a generational opportunity or a value trap. So buckle up.
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So what's happening with Nike? This is a fun episode for me to do because
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I seldom do individual company episodes. This is
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fun for me. It may not be for you. A lot of people like when I talk about the economic
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stuff or the dividend stuff or the property collapse. It seems
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to be like interesting stuff for people because they like to be up to
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date with what's happening or see the future of what may happen. So
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this is a bit of change of tune which is cool. If you haven't seen it, Nike's
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stock price is down 78% since 2021. That's a big fall for a company like Nike. So
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let's have a think about what causes 80 odd percent collapse in
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one of the biggest sporting brands in the world, if not the biggest sporting
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brand. Investors have lost billions in value. Some
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billionaire investors like Bill Ackman has purchased
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Nike, I believe. And what's interesting is Tim
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Cook, the former CEO of Apple, he's also an investor in Nike. So,
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you know, these clever guys that they're buying, they've been buying into this, and
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the guy I follow as well, he's a pretty good investor. He bought Nike
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in a big way for $70, and it's down half, and I know he had a big position. So,
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it's cleaning a few people up, right? So, I want
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to go through this with you. Is it dying, or is
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it a generational buying opportunity? I want to first look at Nike
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10 years ago. in terms of the fundamentals. So we don't know from
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price alone what something is worth. We have to look
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at the underlying fundamentals. How much money is it making? What are the
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revenue figures? What are the growth figures? What are the earnings? What's the actual value of
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this company? And what is its propensity to earn
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income, right? Let's do a snapshot. 10 years ago to today.
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So in 2016, the annual revenue was $32 billion. Now, 10 years later, So
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revenue's growing, that's good. Net profit, here
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we go. This is where profit is, stock price follows profit
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growth. That's just a fact. And eventually it catches up
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to it, and sometimes it can overshoot. Net profit in
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2016, 3.7 billion. Today, 3.1 billion, so it's fallen. In
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10 years, the earnings have fallen, which is what has caused the
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price to fall. And if the price is, if the company is really overvalued, which
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it seems like it was in 2021, after that big boom, it's
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just going back, it's falling back to its actual value, which
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is why you gotta always be careful what you pay for things, right? They say
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you make money on the buy, not the exit. Earnings per share are
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down, the gross margin is under pressure, so it was 46% 10 years ago,
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now it's 42. So the margin compression's starting to happen. Dividends
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are up, so it's gotta now cover that dividend with its investors, right?
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Which is also challenging for a company that's facing some
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short-term headwinds here. And I do believe they're short term because the brand is
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powerful. If they just change a few things, I think they can get it going. But revenue's
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growing, profit's falling, and the
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company's still selling billions in products. It's just making
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less than it did 10 years ago. That's what's happening. That's what we've got here. So
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during the peak, the shares were $177 and now they're $35. This
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is why buying individual stocks is a tricky game. So there's been an
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80% drawdown, which is why it's such a popular topic. Those
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fundamentals, they have changed. They're not drastic. It's not like the profits fell
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80% and you're seeing a commensurate fall in the stock price. The
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earnings fell a bit, 17%. So you would think you'd see
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a 17% fall in the price, but you're seeing 80. So you could see how
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overvalued it truly was, yeah? So 100,000 invested at
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the peak would now be worth 19K. Excluding dividends,
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wild. Right? Imagine holding this for 10 years. Crazy.
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So what went wrong? Let's have a look at it. So, a lot of competition,
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I think. Competition, capitalism is destructive.
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The idea of capitalism is to destroy. Destroy competitors. Hocker
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and adidas other competitors muscling in if you look at
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it, that's what's happening So there's slowing footwear sales in
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general because it's discretionary Meaning the consumer
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decides that they don't want it. They don't buy it. It's not
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consumer staples You have to buy food. You have to buy fuel, etc, etc But
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you don't have to buy new sneakers. We're starting to see the knock-on effect of
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the challenged consumer in Nike sales a
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lot of weakness in China big market and And it's
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lost a lot of its innovation advantage that it had. And I
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believe it lost its way with its messaging. So if you look at a
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brand like Nike, what makes it different
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from any other sneaker? And the answer is probably not much, except
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for the swoosh, the brand. The brand enables it
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to sell at a premium price. And the brand enables
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it to sell at a price beyond its competitors. And if I ask you this
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question, I'll say, what built Nike's brand? And you could
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argue that there's a combination of things, which is true. But what really built it?
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Michael Jordan built Nike. Really, if you think about
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it, it's the oldest influencer marketing opportunity ever. And
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he's arguably the greatest sportsman across sporting ever, and
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he has his own range in Nike. So
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if you look at night two, it was backing like just do it. It was very hardline
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competitive Mark Jordan's a winner. There was other
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athletes that are sponsored Tiger Woods. So Nike was backing
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and Sponsoring the best in the world not the second best not
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the fifth best the best in the world not just the best either the
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goats the go to golf you go to basketball and
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tennis so if you think about What nike has really
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built? Is a partnership with the greatest athletes who've
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ever lived so you associate nike with the greatest Does
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that make sense? And that's what made it a globally recognized brand.
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It's got decades of sporting heritage, right? massive global
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distribution people bought Nike hats to play
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golf because they want to be like tiger woods. They bought nike jordan shoes
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because they're like jordan So they had these really
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established athlete partnerships. And if you look at something
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like Michael Jordan, he's getting older. He doesn't play sports anymore. Tiger Woods
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flipped, we know what happened there. He's come and done a bit too. So
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they've lost these leading influences of
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the brand. And I believe that's what's happened. But if we add
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to the changes too, they've also gone
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woke. So they've started sponsoring fat people on screens, and
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there's no other way to say it, but that's what they are. Like, people can be fat. If
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you came to listen to a political podcast, this is not it. But that's
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what happened. It's just not Nike's brand. It's okay to
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be a winner and be lean and be in good shape. And
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that's what built the brand. So you can't just flip it and
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go, oh, by the way, if you're overweight and don't even play sports and you're flipping, you
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don't even know what gender you are. Mark, that's not Nike's brand.
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It might be someone else's brand. I'm not saying there's anything wrong with it. People live
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their life how they want to live, but you can't bring a completely opposite
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influencer into a brand that's been built decades and
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decades on winning and bring in those that don't appear to
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be winning. It's the marketing department's probably a
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lot to answer for at Nike and it's probably lost its winning edge And
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that's just what happens if you don't innovate you die So
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what's interesting about this is that I don't look
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to buy stocks just because they've fallen 80% peak to trough even
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like Because if you look at a brand like Nike or so I
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should say a business like Nike or a business like McDonald's Similar
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they do have a strong brand Can charge a bit more than they're not
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even they can't charge that much more than their competitors, but
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they tend to perhaps sell more now the reason
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why So I looked I'm like if it was that's a good deal
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and a brand of this power Why wouldn't Warren
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Buffett and Berkshire Hathaway be buying it? And what's fascinating if you go
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back far enough into the archives of their Berkshire Hathaway
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meetings someone asked them the question about Nike and
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McDonald's So would you like to know the answer to what they said
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about Nike and McDonald's? This is what they said. This is what Warren
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Buffett said. Nike's a great brand. Great
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shoe, great brand. Good question. This is a guy, by the way, that
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bought Dexter shoes and lost every single dollar. It's the worst investment he ever made. He went
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to zero. He reckons it cost him $10 billion in Berkshire stock. The
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value of it today would be that, maybe. Big mistake. So he knows about shoes.
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But he said, there's a little bit of competitive advantage in
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the brand that people don't switch, because they identify with
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the people that are in the brand. But if you can no longer identify with
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people who are in the brand, there's no reason not to switch. I
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believe that they're the types of Idols that kids aspire
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to be like kids like to be a line I bought Nike Jordan ones because
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I want to be like Mike That's what's happened. But anyway getting back to Warren Buffett. He
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said if someone goes into the shoe shop There's an easy
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substitute if someone's driving down to get McDonald's and
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they feel like McDonald's one way One day they may feel like
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Hungry Jack's or Burger King the next day. I So there's no real reason
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why they keep going back to the same. So that's called easy
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substitution. And the easier something is to substitute, the less
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competitive advantage it has in the marketplace. So you can
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see, if kids all of a sudden go, I want to be like Ronaldo, and
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he wears Adidas, I'm getting Adidas. Easier substitute. I
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won't go there. I'll go here in the store and buy these. That's pretty much it. Same
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with Maccas. So they've got great brands for sure. They do. They're valuable. McDonald's
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probably has a more effective competitive position because it actually owns
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the real estate that its restaurants are part of, which is a competitive advantage. So it's got
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distribution, scale and advantage, but
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probably not pricing power or real genuine
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brand power because people will go to another brand
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straight away. However, if you look at a company like Apple, for example,
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like I'm going to buy a new iPhone this weekend. I'm going to tell my wife, Alicia, I'm going to buy a
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new phone, just because I think it's time for an upgrade. I have
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heard, though, that there's not much difference. Isn't that interesting? So
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we're still going to buy new phones, even though there's not much difference. It's
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the power of Apple, man. What a company. It's because when you buy an Apple
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phone, You have Apple Airpods. You have an Apple
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operating system that plugs into your Apple Mac or Airbook or
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MacBook Pro. You have Apple charger. You
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have an Apple Airpods. You might have an Apple Watch. You
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have the Apple App Store and you know how to use it. And
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you have all these other, it's an ecosystem, right? And
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you have Apple Pay and Apple Wallet. So Apple's built an
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ecosystem. And it's not easy for me to switch. I'll give you an example. It's
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easy for me to go and get a pair of Adidas, for sure. It's easier.
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It's easy for me to go to Burger King instead of Macca's. But it's
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not easy for me to switch iPhone because I've got to go and learn a new operating system
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on Samsung and I'd hate that. That would kill me. So I
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ain't leaving. I'm not leaving! I'm staying here.
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And that's why Apple, to this day, is Warren Buffett's biggest position. Because
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here's why. If you had a choice between having your car
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and having this contraption. So having your car, or having
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this, you'd choose this. You can always take public transport, you can't get another one of
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these, right? Now there are substitutes. So they can't rise their prices
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too quick, but these are now two and a half grand to buy. They used to be $1,800, now they're
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two and a half grand. That's called pricing power, people. And
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I don't care what it costs. If this was $10,000, I'd still buy it,
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because that's how powerful this is. So this has pricing power,
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and it has stickiness. So each brand represents something. Not
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just feel, but it's the business economics that
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makes sense here. And Nike doesn't have those business economics. So
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let me explain this. I wouldn't invest in Nike. It
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doesn't matter how cheap it's going to get, because the business economics don't
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make sense. So I don't know what's going to
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happen to Nike in the next 10 years. And if I don't know what's going to
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happen to it, how can I bet big on it? Does that make sense?
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So these are the things to consider if you're going to be an individual stock investor.
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Okay, now other big investors have bought the stock for sure as
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I said Bill Ackman has I don't know what's gonna happen there He's obviously a
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clever guy, but just because it's fallen doesn't mean I'm
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gonna buy it you have to understand the business economics And
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you have to have a very high level of certainty and conviction That's gonna
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be around in 10 years and be doing well right not just be around but doing
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well So even though insiders are buying I think Tim
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Cook's actually a director of the company I'm pretty sure so he bought I think he
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bought it in by that much he bought three million or something It's not small,
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but not massive. In fact, I think he bought two tranches. Nike's
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CEO, Elliot, he just bought, I think he bought
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a couple of tranches of a million each. So this is interesting to
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see insiders buying. It's really good. It's a good signal of confidence. But,
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you know, it doesn't guarantee a recovery. And Warren Buffett famously
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says, I don't want to invest in turnarounds. So I think it's, as
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Charlie Munger would say, it's in the too hard basket. This is a
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too hard basket one. It shouldn't be this difficult to
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determine the durability of a business competitive advantage. And
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if it is hard, it's in the too hard basket because you can buy much
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easier deals out there, I think, than this one. So I'd say that's me.
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I'm not touching Nike. Good luck to those who are. I've learned my lessons
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in the stock market. I've learned my lessons buying things because they're cheap. It's
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not how I operate. And thankfully I've learned that lesson. It
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took me a long time. But I really am looking for the business economics. I'm
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looking for a reasonable price. Nothing crazy. I don't want to buy overvalued.
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I don't want to buy cheap either. I'm just looking for a reasonable price like
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all the companies we own. I have been actually buying a little bit of
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BHP recently, not that I want to share that so you go copy
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my trade, please don't, this is just educational, I don't want to
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give any advice. And the reason for that is the structural copper under
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supply for the next 50 years. But I would say I've bought
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into that, not at a cheap price either to be fair, but I like
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the 4% fully frank dividend to hold onto it for
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a bit. And I know that BHP's got traditionally had even dividends of 5, 6% in special
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dividends for sure. But if you look back at BHP as an example, It's
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actually beaten the S&P 500, which is fascinating. And
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it's a big local stalwart in Australia, and it's the leading miner
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for copper. And copper is how you play the upstream of
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the AI trade. So that's where our position is.
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Probably my most expensive position I've done.
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I seldom buy like that. But what I've learned is a company
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like that, with the structurally undersupplied copper and multiple
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revenue streams and AI coming, and you
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can't just disrupt the miner, I'm pretty confident with it. So
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as long as it's not too overpriced, and I don't think it's too, it's
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not cheap, that's for sure. So I think that's how you want to assess these
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things. Don't always just run for bargains. It can be a value trap. I've
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experienced this myself before a number of times.
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I bought this company once, Stellantis. There was a guy called Greg Alexander,
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one of the few guys that Warren Buffett says he would give his
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money to manage. Clever guy. And he
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had a big position. His number one position was in Stellantis, which
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is a car company, multi-brand car company. I
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think Chrysler merged with Fiat, I can't remember.
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And it was a leading car company. Now this is when the Chinese cars started
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to come to market. And this thing was paying a flippin' pretty
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good sizable dividend. I forget what it was now. 10% maybe, it
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was really good. And it had a pretty good leader. And
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I think I was buying it for $10 a share. Maybe
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30, I was like, oh this is a pretty good deal. It had 25, it had
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20, what did it have? It had 25 billion in cash from
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memory. What was a pretty big number? I forget. It was
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a big number. And like a lot of his market was cash. And
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I thought, this is pretty good downstream protection. And I bought it. Anyway, it moved along, got
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paid dividend, went up a little bit. And I was like, you know what? I really don't understand the car
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manufacturing market well enough to be playing here. And I
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had a reasonable position, but not huge. And I was like, you know what? If
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I can't bet the whole thing on the company, it means that I don't understand
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it well enough. And that's my litmus test. If I can't put my entire net
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worth in this business, I probably shouldn't buy it and own it. So I sold it.
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Anyway, I looked at it the other day, it's $4. Fucking hell. So
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that was a proper value trap. Even the best in the world like Greg Alexander make
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huge errors like that. We're seeing Dev Kanesaria, he's
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a very well-known super investor. And
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he bought FICO and held it, and it's down 50% in
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the last couple of days. He's just been absolutely killed. So
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you've got to be careful, you should diversify, but even the
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best can make mistakes, and I believe maybe some of these people buying Knife
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may have made a mistake, unless they can write the ship, which is possible, totally
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achievable. Let's see what happens. Be
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careful when you're buying individual stocks, and if you don't want to do that
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and you want to know where to start Here's what I'd suggest go back
17:23
on my episodes and find the one that says Investing
17:27
masterclass not meant for the public. Please go
17:30
and watch that episode It'd be with the one of the most valuable pieces of
17:34
content. We've ever created. It's totally free and
17:37
I think I sent it to my auntie the other day I don't
17:40
know what it is whether I bought a Ferrari and now my aunt everyone thinks that I'm doing
17:44
better than I was but even though it's the same It's a weird thing. People
17:48
lose their minds. But she's so sweet. I
17:51
love her. She messaged me and said, hey, can you give me some help in trying to
17:55
figure out what we're going to do? And that's interesting. I was like, that's interesting. She's like,
17:58
I'm really hearing your content. I'm really following your content. And I'm like, that's cool. She
18:01
goes, I didn't know you were that smart. I just thought you talked a lot. She sent it
18:04
to me yesterday. I thought it was hilarious. It's really funny.
18:08
And I think the reason I'm telling you this is because yesterday I sent that
18:11
piece of content to her. And because I think it's a really good
18:15
grounding in really just beginning to understand shares,
18:19
but also understanding where they come from, understanding how to play with index funds.
18:22
It's just a good grounding of education. So I sent that to my auntie. So
18:26
anyway, I digress. That's what I think about Nike. Let
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me know what you think in the comments. Do you think Nike's a value trap, or do you think it's a bargain?
18:34
I'd love to know. Hit the subscribe button, and thanks for listening to my half-healthy
18:37
voice as I get through these episodes after the week