Adidas Stock is a sale because the iconic brand is losing steam

Back then, a pair of sneakers promised to help you run faster and jump higher. Now, shoes – at least their brand – should make you money, too. Over the past three years, Adidas (OTCMKTS:ADDYY) did its best, as ADDYY was the only stock to outperform the market during this period.

There are four major publicly traded companies in the footwear and sportswear industry: Adidas, Nike (NYSE:NKE), Under protection (NYSE:UAA), and Skechers (NYSE:SKX). In those three time periods – and despite the age-old headwinds in sportswear adoption – shares of Skechers and Under Armor fell 25% or more. Nike underperformed the market with a gain of just 15%. The S&P 500 Index increased by 20%. Meanwhile, Adidas’ stock has more than doubled.

But, history is not a precise indicator of the future. Unfortunately, when it comes to Adidas stocks, the success of the past three years will not be repeated over the next three.

The competition has finally caught up

The retro trend that made Adidas the hottest sportswear brand is gone. Today, the three-stripe brand is quickly running out of steam amid increasing competition, mainly from Nike and Lululemon (NASDAQ:LULU). Usually these trends take several years to manifest, and this one is still in its first year.

As such, Adidas stock – which has leveled off over the past year as the brand has lost momentum – looks set to stay at neutral for much longer.

Throughout 2015, 2016 and early 2017, Adidas relished the brand’s unparalleled popularity in the sportswear arena. A return to retro styles kicked off the Adidas resurgence in 2015. Next, Adidas invested money in shoe innovation and leveraged celebrity support to become a style brand. of life. This only improved the already growing popularity of the company. As a result, Adidas stole tons of wit and market share from Nike.

But then the sleeping giant of Oregon woke up. Nike realized that its product innovation was lagging behind its German competitor and that they were falling behind on the lifestyle front. So, in mid-2017, Nike launched its Consumer Direct Offense initiative, transforming the swoosh into a lifestyle brand with faster product innovation and a direct selling approach. The result? Nike has rebounded its sales in North America, with the company now growing at a high rate over several years.

Of course, Nike’s return means Adidas has run out of steam. Two years ago, Adidas’ revenue increased by 18%. Last year the increase was 16%. In the last quarter, growth halved to 8%. This is a downward trend in slower growth.

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But, it goes beyond slowing income growth. Take a look at trends in Google’s search interests for both Adidas worldwide and in the we They peaked last year. This year was marked by a sharp drop. It’s not good. As the attached graph shows, trends in research interests have coincided with Adidas stock. The huge growth in research interests in 2015-16 coincided with a rise in Adidas stock, while the decline in research interest growth followed the fall in ADDYY stock in 2017-2018.

Today, growth in research interest is in fact turning sharply negative for the first time in five years. This can only mean bad things for the Adidas stock to come.

Adidas stock will struggle to rise higher

At current levels, the price of Adidas shares is not set for the brand to continue to falter. Instead, it’s still priced for the brand to gain momentum.

The current multiple of forward earnings is greater than 20x. This is about 10% more than the five-year average term multiple of 18x, and also about 30% higher than the average multiple of anticipated clothing retail profits of 15x. The price / book multiple is also above its five-year average, while the dividend yield is below its five-year average.

Simply put, Adidas stocks are always more expensive than normal. That does not make sense. The risks of recession are looming on the horizon. Growth is slowing down. The brand is quickly running out of steam. The trend is now Nike and Lululemon.

In other words, the appropriate valuation for ADDYY stock – at best – is a historically average valuation. This implies that stocks are currently overvalued by around 10%. As long as the Adidas brand continues to run out of steam, ADDYY stock will struggle to soar.

The time to buy ADDYY shares has come and gone. Now it’s time to buy NKE and LULU stocks, and forget about Adidas. Until the trend changes course and Adidas rekindles growth, Adidas stock will remain neutral.

As of this writing, Luke Lango has long been NKE, SKX, UAA, and LULU.

James T. Quintero