On Holding AG (ONON): Can the Premium Play Overcome Margin Headwinds?

The athletic footwear market is a battleground of branding, innovation, and margin management. On Holding AG (ONON) has emerged as a disruptor, leveraging its DTC (direct-to-consumer) strategy and premium positioning to drive record sales. Yet its Q1 2025 results reveal a tension between explosive growth and profitability pressures. Is this stock’s 11.83% recent rally sustainable, or is it overextending its premium playbook? Let’s dissect the numbers.

The Growth Story: Sales Surge and DTC Dominance

On’s Q1 2025 net sales surged 43% year-over-year to CHF 726.6 million, with its DTC channel accounting for 38.1% of total sales—up from 35% in Q1 2024. This channel’s 45.3% growth underscores the success of On’s store rollout and e-commerce focus, which command higher margins than wholesale partnerships. Apparel and accessories also exploded, with sales rising 93% and 99%, respectively, signaling a shift from its shoe-centric past to a full ecosystem of premium activewear.

The Cloudsurfer 2 and Cloud 6 shoes, paired with collaborations like Zendaya’s campaign, have amplified brand buzz. Meanwhile, Asia-Pacific sales nearly tripled in constant currency terms, proving On’s global scalability. Management’s raised full-year guidance—28% sales growth on a constant currency basis—reflects confidence in this momentum.

The Profitability Concern: Margin Pressures and Execution Risks

Despite the top-line triumph, net income plummeted 38% to CHF 56.7 million, with margins collapsing to 7.8% from 18% a year ago. This decline stems from aggressive investments: marketing spend, global store openings, and R&D for product innovation. While gross margins held steady at 59.9%, the net margin contraction highlights a critical trade-off—growth vs. profitability.

The adjusted EBITDA margin improved to 16.5%, a positive sign, but currency headwinds and supply chain costs loom. The Swiss Franc’s strength erodes foreign earnings, while trade policy risks (e.g., tariffs) could further strain margins. Management’s reliance on pricing power to offset these pressures is a gamble in an era of macroeconomic uncertainty.

Valuation Crossroads: Overvalued or Undervalued?

On’s stock trades at $57.38, up 11.8% this month but still below Morningstar’s $67.56 fair value estimate. The forward P/E of 55.98 suggests investors are betting big on long-term growth, but this multiple is 2.3x higher than the S&P 500 average. Meanwhile, the 334% premium to Morningstar’s valuation and a high uncertainty rating raise red flags.

Comparisons to peers like Crocs (CROX) and Allbirds (BIRD) are instructive. While On’s brand equity is stronger, its debt-to-equity ratio (21.3%) and volatile beta (2.17) indicate risk. Meanwhile, the broader AI sector’s outperformance—driving capital away from traditional sectors—could pressure On’s valuation if investor sentiment shifts toward tech-driven growth.

The Bottom Line: A Risky, but Compelling Bet

On Holding AG is a story of premium branding at scale, with a DTC-led model that’s proven to resonate globally. Its product innovation and Asia-Pacific expansion are clear growth catalysts. Yet the margin erosion and execution risks—currency volatility, trade policies, and over-investment—pose near-term threats.

Investors must ask: Is On’s premium strategy defensible in a slowing economy? Can it sustain margins as it scales? The 28% sales guidance and EBITDA margin targets (16.5%–17.5%) suggest management believes so.

Call to Action: Proceed with Caution, but Proceed

For growth-oriented investors with a 3–5 year horizon, On’s stock offers high reward potential if it executes its strategy. The brand’s cultural relevance, DTC dominance, and underpenetrated markets justify the valuation. However, the high volatility (beta of 2.17) and margin risks demand caution.

Buy the dip? Possibly. On’s stock is trading at a discount to its fair value estimate, and its YTD return of 4.77% lags its 1-year outperformance. But investors must monitor margin trends and macro risks closely.

In a world of AI hype, On’s bet on analog premium goods feels quaint—but that’s its strength. For now, the stock’s rally is justified by growth, but profitability will be the ultimate decider.

Final Verdict: Hold for the long game, but brace for volatility. On’s premium model could be a winner—if it can keep margins afloat.