Is On Holding AG (ONON) a Compelling Buy Amid Strong Earnings Growth and Industry Momentum?

In the world of premium athletic footwear, few names have risen as swiftly as On Holding AG (ONON). The Swiss-based brand, known for its CloudTec cushioning and minimalist design, has captured the imagination of runners and investors alike. But as the stock trades at a lofty valuation, the question remains: Does On's 14% ROE and 69% five-year net income growth justify its current price tag?

The Fundamentals: ROE and Earnings Growth

On Holding AG's 14% ROE (trailing twelve months) is a key metric for investors. While this figure aligns with the Luxury industry average, it's worth noting that the company's Q1 2025 ROE was a mere 3.89%, due to a 38% drop in net income year-over-year. This discrepancy highlights the volatility in On's quarterly results, driven by factors like higher SG&A expenses and foreign exchange losses. However, the long-term picture is compelling: Over the past five years, On has transformed from a net loss in 2020 to a 275M CHF net income in 2024, a 69% compound annual growth rate (CAGR). This meteoric rise is fueled by a strategy of reinvesting 100% of profits back into the business—no dividends, just growth.

The company's DTC (direct-to-consumer) strategy has been a game-changer. In Q1 2025, DTC sales surged 45.3% to CHF 276.9 million, while wholesale grew 41.5%. This dual-channel dominance has not only boosted revenue but also allowed On to maintain premium pricing and control over brand identity.

Valuation: Expensive or Justified?

On's valuation metrics tell a story of high expectations. The stock trades at a trailing P/E of 71.28 and a forward P/E of 39.29, far above industry peers. Its P/B ratio of 10.09 and PEG ratio of 1.72 further suggest the market is paying a premium for future growth. Yet, the numbers don't paint the full picture.

On's five-year net income growth of 69% is rarely matched in the luxury goods sector. The company's gross profit margin expanded to 59.9% in Q1 2025, and it raised full-year guidance to at least 28% constant currency sales growth. With new product launches like the Cloud 6 and Cloudsurfer 2 driving demand, On is betting big on innovation.

Stock Performance: A Tale of Two Timeframes

The stock has delivered 32.88% returns in the past year, outperforming the S&P 500's 18.33%. Over three years, it surged 162.46% versus the S&P's 61.05%. However, the five-year return (43.39%) lags behind the index's 98.67%. This underperformance highlights the risks of a high-beta stock (2.26) in a volatile macroeconomic environment.

Analysts remain bullish, with a "Strong Buy" consensus and a 12-month price target of $62.90 (23.92% upside). But the high valuation comes with caveats. Rising tariffs, currency fluctuations, and global trade tensions could pressure margins.

Risks and Rewards

While On's fundamentals are undeniably strong, the valuation is stretched. A 14% ROE is solid, but it must continue to grow to justify the high P/E. The company's reliance on DTC growth and product innovation means any misstep in execution could hurt.

However, for investors with a high risk tolerance, On's premium positioning and brand loyalty create a moat. The company's ability to balance top-line growth with margin expansion (despite Q1's net income dip) shows operational discipline.

Investment Recommendation

Is On a buy? It depends on your risk appetite. The stock is undeniably expensive by traditional metrics, but its five-year growth trajectory and innovative edge make it a compelling long-term bet. For those who can stomach volatility, the combination of high growth, brand strength, and a premium valuation could pay off if the company continues to execute.

Key Takeaway: On Holding AG is a high-conviction play. If you believe in the power of premium athletic brands and On's ability to outperform in a fragmented market, the stock could reward patience. But if valuations feel too frothy, consider waiting for a pullback or diversifying into the broader sector.

In the end, On is a story of reinvention. From a niche Swiss brand to a global name in premium running shoes, its journey mirrors its stock's volatility. Whether it's a compelling buy depends on whether you're betting on the next “Cloud” or the next “Crash.”