On Holding AG (ONON): A Cloudy Outlook with Silver Linings in the Premium Running Shoe Market

The premium running shoe market is a battleground of innovation, brand loyalty, and razor-thin margins. Amid this fiercely competitive landscape, On Holding AG (ONON) has emerged as a disruptor, leveraging its proprietary CloudTec technology and elite athlete partnerships to carve out a high-margin niche. While recent quarterly earnings pressures have spooked short-term traders—Q3 2024 net income fell 48%—the company's strategic focus on sustained growth through product differentiation and geographic expansion suggests this dip is a temporary cloud on an otherwise sunny horizon. Let's dissect the catalysts that make ONON a compelling long-term play.

Outperforming the Market, but at What Cost?

ONON's stock has delivered a staggering 204% total return over the past three years, far outpacing the S&P 500's 62% gain during the same period. This outperformance isn't accidental. The company has bet big on its CloudTec midsole technology, which combines energy return, cushioning, and lightweight design to appeal to both casual runners and elite athletes. The strategy has paid off: ONON's direct-to-consumer sales grew 23% in 2024, while its premium-priced Cloud and Speed collections dominate category reviews.

However, this growth has come with financial growing pains. Q3 2024 saw net income plummet to CHF 10.8 million, down from CHF 20.7 million a year earlier, driven by higher raw material costs and aggressive marketing spend. Yet, buried in the noise is a critical metric: free cash flow surged 32.8% year-over-year to CHF 121.4 million, signaling operational resilience. Unlike many competitors, ONON isn't burning cash—it's investing it strategically.

Brand Equity and the Power of Partnerships

ONON's athlete sponsorship strategy is a masterclass in building aspirational brand equity. Partnerships with icons like Roger Federer (a lifelong On devotee) and Iga Świątek (who wore On's Cloudflow sneakers to Wimbledon) amplify the brand's “athletic lifestyle” appeal. These endorsements aren't just about visibility; they validate On's premium positioning in a market where consumers are willing to pay $200–$300 for performance footwear.

The company also wields its direct-to-consumer model as a competitive advantage, reducing reliance on wholesalers and enabling higher margins. In 2024, direct sales accounted for 45% of revenue, up from 38% in 2020. This shift isn't just a numbers game—it's about owning the customer relationship, a trend that will pay dividends as e-commerce and personalized fitness continue to dominate.

Market Opportunity: The $19.5B Premium Running Shoe Prize

The global running shoe market is projected to hit $19.5 billion by 2025, with the premium segment (defined by advanced technologies like carbon-fiber plates and energy-return foams) leading the charge. ONON's CloudTec system—patented, durable, and endlessly customizable—positions it to capture share from legacy giants like Nike and Adidas, which are struggling with inventory overhangs and declining innovation cycles.

Crucially, ONON's geographic expansion is accelerating. While Europe accounts for 47% of revenue, the company is targeting the U.S. (its second-largest market) and Asia Pacific (where running participation is soaring) with localized product lines. In 2024, sales in Asia grew 29% year-over-year, fueled by partnerships with Chinese e-commerce giants and a push into high-margin urban markets.

Valuation: A Premium Price for a Premium Play

At a Forward P/E of 46.79, ONON trades at a significant premium to its peers—Adidas trades at 39.56x, while Skechers trades at 15.17x. But this valuation isn't without justification. The company's 30% revenue growth trajectory (projected for 2025) and 20% operating margin target (up from 14% in 2023) suggest it's on track to sustain its growth story. Meanwhile, its PEG ratio of 2.28—while elevated—reflects investor confidence in its ability to scale without sacrificing profitability.

The skeptics will point to the Zacks #3 Hold rating and its low industry rank (187/250), but these metrics overlook ONON's unique strengths. Unlike many retailers, it's not competing on price—it's competing on technology leadership, brand storytelling, and customer stickiness. In a market where loyalty drives repeat purchases, On's 70% retention rate among U.S. customers speaks volumes.

Investment Thesis: Buy the Dip, Bet on Innovation

ONON's near-term challenges—cost pressures, inventory management, and macroeconomic uncertainty—are real but manageable. The company's free cash flow resilience, strategic investments in emerging markets, and patented tech moat suggest it can weather this storm. At current levels—around $51.48 per share, down 13.5% month-to-date—ONON presents a compelling entry point for investors willing to look past quarterly volatility.

Risk Factors: Overreliance on Europe, margin compression from rising material costs, and intensifying competition from Nike's “sport offense” strategy.

Bottom Line: ONON isn't just a running shoe maker—it's a tech-driven lifestyle brand in a $20 billion market with secular tailwinds. For investors focused on the next five years, its premium valuation is a fair price to pay for premium growth. Hold for now, but consider adding on dips below $48.

The author holds no positions in ONON or related securities.