Under Armour has had net revenue growth above 20% for the past 24 consecutive quarters. Given this impressive growth, you would expect the company to have a premium valuation. Unsurprisingly, UA boasts a frothy forward P/E ratio of 45 and a current P/B ratio of 14. However, I would argue that this stock has plenty of room to run, and the current competitive environment is ripe for Under Armour to succeed.
Lets take a look at some of the key drivers that have been propelling this company forward.
The screenshot above is from Under Armour’s most recent quarterly results. The number that pops out at me the most is the exceptional 64.2% net revenue growth in the footwear category compared to the previous year. The firm attributes this huge growth in footwear to the Steph Curry signature basketball line, and the Jordan Spieth golf shoes. This growth can also be attributed to a progressively more recognizable brand. The brand is benefiting from college and professional licensing agreements, and international marketing exposure. The company has only been in existence for 20 years, so we can expect this brand to cement itself into the industry as the years go by. By comparison, Nike is 52 years old, and Adidas is 92 years old.
At first glance, Under Armour’s valuation seems to be expensive. However, digging deeper into the dynamics of the apparel industry gives us further insight into what a proper valuation should be. UA’s total market cap is currently a modest 6.93B compared to Nike’s 96.1B market cap. UA can gain massive amounts of market valuation simply by chipping away at Nike’s market share in their various product lines. Under Armour is a very nimble company considering their young history and increasingly expanding product offerings. I don’t think it will be hard for them to gain market share from their competitors in at least a few product categories.
In addition to the shear size of the apparel industry, Under Armour has a chance to expand into international markets that can increase top line growth for years to come. International net revenue growth in the latest quarter of 2016 grew 56% year over year. Only 12% of Under Armour’s 2015 total sales came from international markets (http://www.marketwatch.com/story/heres-why-under-armour-stock-is-a-slam-dunk-2016-03-25). The untapped markets in international territories represent huge opportunities for the company, and UA’s efforts so far have been massively successful as evidenced by the impressive growth rates being achieved.
The timing for buying this stock is perfect. Two key executives have just left the company. Chief Merchandising Officer Henry Stafford and Chief Digital Officer Robin Thurston. This news has caused the stock price to drop from around $47 per share (market cap of 8.6B) in early May, to close to $37 per share (market cap of 6.7B) as of May 22nd. Are these two executives worth a difference of 1.9B of market capitalization? I don’t think so. The brand, international strategy, and product expansions will still live on. Additionally, Under Armour has been developing “smart” running shoes, digital health applications like MyFitnessPal, and various athletic technologies to help differentiate products from competitors and remain competitive in our digital age. The share price drop offers prospective investors a price entry point that may not ever occur again.