On Holding (ONON): Can Earnings Momentum Outweigh Valuation and Sector Headwinds?

On Holding AG (NYSE: ONON), the Swiss sportswear disruptor behind the popular Cloud line of shoes, has emerged as a growth darling in the Footwear & Accessories space. Yet, its stock's recent underperformance relative to its earnings trajectory raises questions about valuation concerns and sector dynamics. This article explores why ONON's robust earnings revisions are at odds with its lagging Zacks Rank—and whether investors should buy the dip or avoid the premium price tag.

Earnings Momentum Defies Odds

On Holding's Q1 2025 results were a masterclass in execution. Net sales surged 43% year-over-year to CHF 726.6 million, driven by a 130% jump in Asia-Pacific sales and a dominant 38.1% contribution from its high-margin DTC (direct-to-consumer) channel. Even adjusted EBITDA margins expanded to 16.5%, a 130-basis-point improvement over 2024. The company raised its full-year sales guidance to 28% constant currency growth, signaling confidence in its product pipeline and regional expansion.

Analysts now project Q2 2025 EPS of 0.22 CHF, a 53.58% year-over-year increase, far outpacing the S&P 500's estimated 13.13% growth. While estimates have dipped slightly from 0.24 CHF over the past 60 days—likely due to macroeconomic jitters—the trajectory remains upward, with 14 analysts maintaining a “Strong Buy” consensus.

The Zacks Rank Disconnect

Despite this momentum, On Holding's Zacks Rank (as of June 2025) lags behind its earnings story. The Zacks Rank, which aggregates earnings estimates and momentum trends, currently assigns ONON a #3 (Hold) rating—mid-range in its scoring system. This disconnect arises from three factors:

1. Sector Underperformance:
   ONON operates in the Consumer Cyclical sector, which has struggled amid rising interest rates and trade policy uncertainty. While ONON's fundamentals shine, broader sector headwinds—such as weak consumer discretionary spending and tariffs on imported goods—drag on sentiment.

1. Valuation Concerns:
   At a trailing P/E of 140 and forward P/E of 91, ONON trades at 3x the S&P 500's valuation. While its 28% sales growth and premium brand positioning justify some premium, skeptics argue the stock is overbought. The PEG ratio (P/E divided by growth rate) stands at 3.9, suggesting valuation may outpace growth in the near term.

2. Margin Volatility:
   Despite rising sales, ONON's net income dipped 38% in Q1 due to currency headwinds and elevated operating costs. While adjusted metrics like EBITDA reflect progress, volatility in earnings quality keeps investors cautious.

Valuation vs. Growth: A Tightrope Walk

ONON's $10.4 billion market cap rests on its ability to scale its DTC model and sustain Asia-Pacific growth. Here's the balancing act:

• Upside Drivers:
• Brand Momentum: Its influencer partnerships (e.g., Zendaya) and innovation (e.g., LightSpray™ technology) are fueling a cult following.
• Regional Leverage: Asia-Pacific's 130% sales growth suggests untapped potential, with plans to open 50+ new stores by year-end.

• Margin Expansion: Gross margins are expected to hit 60.0%–60.5% in 2025, aided by premium pricing and cost controls.

• Downside Risks:

• Trade Policy: A 90-day tariff pause on U.S. imports expires soon, risking margin pressure.
• Currency Volatility: The Swiss Franc's strength against operating currencies like the USD/EUR could further squeeze reported earnings.
• Competition: Nike and Lululemon are doubling down on premium segments, intensifying price wars.

Investment Considerations

Should investors buy ONON at current levels? Here's a breakdown:

• Long-Term Hold:
  For investors with a 3–5 year horizon, ONON's 28% annual sales growth and brand equity make it a compelling growth story. A 5-year EPS CAGR of 20% could justify today's P/E if growth materializes.

• Short-Term Caution:
  Near-term risks—tariffs, currency swings, and sector rotation—could pressure the stock. A 5–10% pullback to CHF 55–60 (from current CHF 68) might present a better entry point.

• Technical Picture:
  The stock's 50-day moving average (currently at CHF 64) is critical. A close below this level could signal a deeper correction.

Conclusion

On Holding's earnings momentum is undeniable, but its premium valuation and sector headwinds create a high-risk, high-reward scenario. Investors must weigh whether ONON's growth can outpace its valuation and external pressures. For bulls, the Asia-Pacific expansion and DTC dominance offer a path to sustained outperformance. Bears, however, will point to the PEG ratio's warning and the fragility of high-multiple stocks in volatile markets.

Final Take: ONON is a hold for now. Wait for a pullback to below CHF 60 or clearer resolution on trade policies before going all-in. The stock's long-term thesis remains intact, but patience is key to avoiding a valuation trap.

Investment Grade: Hold (Speculative Buy on dips below CHF 60)
Price Target: CHF 75–80 (12–18 month view)