Is Nike Overvalued Despite Recent Gains? Decoding Earnings Volatility and Zacks' Contradictory Signals

The fitness apparel giant Nike (NYSE:NKE) has been a market darling for decades, but its recent financial performance is raising red flags. While the stock has rallied 18% year-to-date on "beat-and-raise" quarters, underlying fundamentals are deteriorating. This article dissects four critical contradictions in Nike’s fundamentals—declining earnings, shrinking revenue, shifting analyst ratings, and valuation misalignment—to argue that the stock faces near-term headwinds.

1. Earnings Estimates in Free Fall: A 45.6% Collapse for FY25

Nike’s earnings story is a tale of two halves. While the company beat Q3 FY25 estimates ($0.54 EPS vs. $0.28 consensus), the year-over-year decline is stark: EPS dropped 30% from $0.77 in Q3 FY24. Worse, Zacks Research’s full-year FY25 earnings estimate now sits at $2.15 per share, a 45.6% plunge from FY24’s $3.92.

The downward spiral is accelerating:
- 22.3% revision drops since October 2024 reflect deteriorating sales trends, particularly in NIKE Direct channels (-13% Y/Y in Q2) and Greater China (-15% Y/Y in Q3).
- Margin erosion is compounding the pain. Gross margins have collapsed 330 basis points to 41.5%, as discounts and supply-chain inefficiencies bite.

2. Revenue Contraction: A 10.7% YoY Drop Signals Structural Weakness

Nike’s top line is crumbling faster than its bottom line. Full-year revenue is now projected to shrink 10.7% YoY to $45.87 billion, with every major region in decline:
- North America: Down 4% Y/Y (currency-neutral) amid weak digital sales.
- Greater China: Off 15% Y/Y, reflecting both macroeconomic slowdown and brand fatigue.
- Europe/EMEA: Slumped 6% Y/Y as consumers prioritize essentials over discretionary spending.

The "Win Now" strategy—cost cuts and brand revitalization—hasn’t halted the freefall. Even equipment sales (up 23% in Q3) can’t offset footwear/apparel declines.

3. Zacks’ Rating Shift: From Hold to Strong Sell

Zacks Investment Research’s recent downgrade to #5 (Strong Sell) is a stark reversal from its prior #3 (Hold) stance. This signals deteriorating confidence in Nike’s ability to navigate its crisis:
- Margin compression: Analysts now project FY26 EPS of $1.94, a further 9.8% drop from FY25 estimates.
- Industry headwinds: Zacks ranks Nike’s Shoes & Retail Apparel sector in the bottom 9% of all industries, citing overcapacity and pricing wars.

The Zacks Rank #5 also factors in valuation risks.

4. Overvaluation: A Zacks F Grade and P/E Premium

Nike’s stock trades at a Forward P/E of 29.11, nearly double its industry average of 15.88. Zacks assigns it an F grade for valuation, arguing the premium isn’t justified by fundamentals:
- PEG ratio of 1.94: Exceeds the industry’s 1.01, implying growth expectations outpace earnings reality.
- Shareholder returns: While Nike spent $1.1B on buybacks/dividends in Q3, this masks weak intrinsic value.

The Contradictions: Why Caution Trumps Optimism

Nike’s recent outperformance is misleading. The stock’s 50-day moving average of $82.28 vs. a $96.56 price target suggests overexuberance in consensus estimates. The Zacks F grade and margin/market share losses underscore a disconnect between sentiment and reality.

Investors face three risks:
1. Earnings volatility: Even "beats" like Q3’s $0.54 EPS are far below prior-year levels.
2. Geographic vulnerability: China’s slowdown and Europe’s weakness lack quick fixes.
3. Valuation correction: A P/E contraction to industry norms would slash the stock to ~$54/share (based on $1.94 FY26 EPS).

Conclusion: Proceed with Caution

Nike’s brand power remains unmatched, but its financials are flashing danger signs. While bulls cling to quarterly beats, the data reveals shrinking margins, declining revenue, and a deteriorating Zacks outlook. Until Nike stabilizes its core markets and reaccelerates growth, the stock is overvalued and risky.

Actionable Takeaway:
- Avoid new long positions until revenue growth turns positive (unlikely before FY26).
- Consider shorting or hedging if the stock tests its 52-week low of $70.75.

Nike’s journey from growth darling to value trap is far from over. Investors ignoring these red flags may pay a steep price.