Nike's updated valuation

About a year ago, I completed my thesis on Nike and valuation and bought the stock

Since then, Nike is down roughly 50%.

I wanted to go back and figure out what I missed, so I learn from my mistakes and get better.

That’s one of the benefits of being a Flanker: your original research doesn’t disappear after you buy. You can look back at what you believed, compare it with what actually happened, and hopefully become a better investor.

After action report

Looking back, I see two problems:

1. My model was too optimistic (in the short term).

2. Elliott Hill’s turnaround hasn’t progressed as quickly as I expected.

3. Given my lululemon investment, maybe it's time to reconsider if Apparel is in my Circle of Competence :-/

My model was too optimistic/had the wrong starting value

I started my valuation with $5.52 billion in free cash flow and assumed 10% annual growth, a 5% discount rate, and a 25x terminal multiple.

That model said Nike's cash flows were worth $291 billion. I took 30% off for a margin of safety, called $203 billion my fair value estimate, and compared it to a market cap of about $114 billion.

Nike looked like it was trading at half of what it was worth.

Here's the problem. Nike's free cash flow has never been $5.52 billion.

Free cash flow was about $6.6 billion in fiscal 2024 and $3.3 billion in fiscal 2025, the last full year reported when I built this. It's $2.2 billion now. There is no year where it was $5.52 billion, and there's no average of years that gets you there either.

...So where did my number come from?

I can't tell you for certain, because I typed it in a year ago and I don't remember. But I went looking, and exactly one line in Nike's financial statements equals $5,522 million. It's total comprehensive income for fiscal 2024. That's net income of $5,700 million, minus $178 million of currency translation and hedging losses.

It is not cash flow. It doesn't subtract a single dollar of capital expenditures. It's an accounting profit number with foreign exchange noise stapled to it.

I built a ten year discounted cash flow model on a number that wasn't cash flow... whoops

Fortunately, I've gotten better in the last year as an investor. I recently sucessfully made a similar distinction while looking at Amazon. Reported earnings were inflated by Anthropic-related gains, but, as I wrote then, “you can’t mark-to-market your way into cash flow.” My Amazon/Anthropic analysis

That’s why it’s important to do your research - and sometimes you’ll still miss something. AI is making these checks easier, but it doesn’t remove the investor’s responsibility to understand the numbers. I think a future update to Flank should make it so you can build your models inside of Flank

Let's fix my mistake and build an updated model!

First, what's happened since I last studied Nike

Nike's fiscal year ended May 31, and the full year results were flat: $46.4 billion in revenue, down 2% currency-neutral, with net income of $3.1 billion and earnings per share of $2.10, both down 3%.

The fourth quarter looked spectacular and wasn't. Gross margin jumped 890 basis points to 49.2% and EPS came in at $0.72. But about 900 basis points of that margin and $0.52 of that EPS were a one-time tariff recovery. Strip it out and EPS was $0.20 and gross margin was roughly 40.3%, flat with the year before.

Here's what happened. The Supreme Court ruled on February 20, 2026 that the tariffs imposed under the International Emergency Economic Powers Act were unauthorized. Nike booked a $986 million recovery, received $302 million of it by May 31, carried $684 million as a receivable, and collected substantially all of the rest afterward. That's real money and Nike gets to keep it. But it is not a sign the business improved. Nike paid those tariffs in cash during the year and is now getting them back. The company is whole, not ahead.

Hold onto that distinction, because I'm going to use it later when I rebuild the model, and I want you watching me when I do.

Tariff risk itself hasn't gone anywhere. The temporary replacement expired in July and USTR immediately imposed new Section 301 duties of 10% or 12.5% on 60 trading partners covering about 99.4% of US imports. Nike's contract manufacturers in Vietnam, Indonesia and China made approximately 52%, 27% and 16% of its footwear in fiscal 2026. Ninety-five percent of the shoes, three countries, all on the list. The exact cost depends on which product codes fall inside the exemption list, and I don't have that yet.

So is the turnaround working?

Partly, and the part that's working is the part Elliott Hill said he'd fix first.

Hill's whole thesis was that Nike broke its own distribution by pushing too hard into selling direct and walking away from the wholesale partners who put Nike on shelves. Repairing that is measurable, and it's happening. Wholesale revenue grew 4% currency-neutral to $27.5 billion, and North America grew 5%. That's the wholesale relationship healing.

Everything else is still bleeding. Nike Direct fell 8% currency-neutral, with digital down 12% and owned stores down 4%. Greater China fell 13% and its operating profit fell 20%. Converse fell 32%, and Converse's operating profit went from $240 million to $18 million. That brand is now a rounding error inside Nike - but it still matters

So the honest read is stabilization, not recovery. Nike fixed the channel it deliberately broke. It has not fixed traffic, digital, China, or Converse.

Is leadership showing they can overcome?

Hill is not spinning it, which I respect. On the earnings call he said the results aren't there yet, and the release talks about continuing to face top-line headwinds. That's a CEO describing year two of a multi-year job.

Two things give me pause.

Nike paid $2.4 billion in dividends against roughly $2.2 billion of free cash flow. It returned more than it generated. That's survivable for a year. It isn't a plan, and it's the kind of thing that eventually forces a choice.

And the CFO left. David Denton replaced Matthew Friend on August 17. Friend had been in the seat since 2020, through the whole direct-to-consumer push and the whole unwinding of it. New CFOs tend to arrive with a broom, so I'd expect fiscal 2027 to include some cleanup that makes the numbers look worse before they look better.

What about the brand?

This was the load-bearing wall of my original thesis. I argued the moat held because Nike was still Gen Z's favorite brand.

That's still mostly true. Nike's teen footwear mindshare fell from 59% in spring 2024 to 49% by spring 2025, which is ugly. But the most recent read, fall 2025, has Nike at 46% against Adidas at 14%, and Piper called the erosion stabilizing. Male share, driven by upper income teens, grew sequentially for the first time since fall 2022.

Worth knowing: Piper has moved that survey to annual, so the next read doesn't land until this fall. Anyone quoting fresher teen data is making it up.

Meanwhile the category is growing for everyone else. Adidas grew 14% currency-neutral last quarter with direct-to-consumer up 25%. On grew 24% currency-neutral in the first half and guides to low twenties for the year.

In fairness to Nike, Adidas had a World Cup. It spent an extra €212 million on marketing to get that quarter, missed on profit anyway, and the stock fell 18% in a day. Growth you rent is not the same as growth you own.

Nike is still the biggest and still the most loved. It just isn't converting that into growth the way the people chasing it are. I still smell opportunity there.

Now let's build our model

Four inputs I need to decide on for this simple model we use in the course. I'm keeping one and changing three.

• Discount rate: staying at 5%.

I'm not moving this and I want to explain why, because it's the input people will argue with.

Buffett discounts at the long-term government bond rate. Not because risk doesn't exist, but because the bond rate is what your money can earn doing nothing, and that's the honest hurdle. The risk gets handled two other ways: only buying businesses whose cash flows you can actually predict, and demanding a margin of safety.

The 10-year Treasury is 4.79% right now. So 5% isn't a made-up number. It's approximately what the government will pay me to take no risk at all.

But that deal comes with an obligation, and last year I didn't hold up my end. If you're going to use the bond rate, every other assumption has to be conservative, because nothing in the discount rate is protecting you. I paired the bond rate with 10% growth for a decade and a 25x exit. That's where the fantasy lived, not in the 5% discount rate.

• Starting free cash flow: $2.9 billion.

Fiscal 2026 free cash flow was about $2.2 billion. I'm adjusting up, and I want to be careful here, because adjusting a number upward to make a stock look better is exactly how I got in trouble last time.

Here's the specific reason. Fiscal 2026 operating cash flow absorbed roughly $1.678 billion of working capital movement, including a $1.207 billion increase in receivables. Of that, $684 million was the tariff refund Nike had earned but hadn't been paid yet as of May 31. Nike collected substantially all of it right after year end. That cash was produced by fiscal 2026 and lands in fiscal 2027.

So $2.2 billion plus roughly $0.7 billion of already-earned, already-collected cash gets me to about $2.9 billion.

That's the only adjustment I'm making. I'm not averaging across years, I'm not normalizing margins, I'm not assuming anything recovers. Every one of those would be me putting my thumb on the scale. The tariff receivable is one line, documented, and already in the bank.

Now, I told you earlier that the refund is not evidence the business improved, and I meant it. So let me be clear about why I'm still adding it back. Nike paid those tariffs out in cash during fiscal 2026, and that cash went out the door before the refund came in. Netting the two puts the money in the year that actually earned it. That's a timing correction, not a windfall. If I left it out, I'd be modeling a Nike that paid a tariff it never got back, which isn't the company that exists.

And this is the assumption most likely to be wrong. Not the growth rate, not the multiple. This one.

The IEEPA tariffs got refunded. The Section 301 duties that replaced them in July will not. Ten to twelve and a half percent, on goods from countries that make 95% of Nike's shoes, with no Supreme Court coming to hand the money back. I can't size it yet, because it depends on which specific product codes fall inside the exemption list, and I haven't done that work.

So here's the honest version. My $2.9 billion is a normalized figure for a company that just stopped paying one tariff and started paying another. If the new duties cost Nike even $400 million a year that the company can't push into prices, my starting number is closer to $2.5 billion, and the base case drops from $59 a share to about $51. Still above where it trades. Not by as much.

That's the number I'll be checking first when fiscal 2027 results land.

• Terminal multiple: 20x, down from 25x.

My original 25x came from Nike's historic price-to-free-cash-flow. The problem is that "historic" means the Nike that grew every year, ran 45% gross margins, and owned the shelf. A terminal multiple is what someone pays for the business at the end of the forecast, and I shouldn't assume the market re-rates Nike back to its best years as a reward for finishing a turnaround.

20x for a mature, slow-growing consumer brand is still a generous number. It's roughly what Nike trades at today on my normalized figure.

Growth: three cases, because one number is a guess pretending to be an answer.

Bear, 0% growth and 15x exit. The turnaround stalls, tariffs eat the margin recovery, China doesn't come back, Converse gets written down. Nike is a big brand that stopped compounding.

Base, 5% growth and 20x exit. Wholesale recovery continues, digital stops falling, margins normalize slowly. Free cash flow reaches $4.7 billion in year ten, still below fiscal 2024.

Bull, 9% growth and 25x exit. The Sport Offense works, China stabilizes, Nike gets back to roughly $6.9 billion of free cash flow by year ten, near its old peak, and the market pays up for it again.

The results, at a 5% discount rate over ten years:

Bear: $49 billion, or $33 a share. After a 30% margin of safety, $23.

Base: $87 billion, or $59 a share. After a 30% margin of safety, $41.

Bull: $141 billion, or $95 a share. After a 30% margin of safety, $67.

Nike closed at $38.44.

Look at the bear case for a second, because I glossed over it and I shouldn't.

Bear says $33. Nike is at $38.44. So if the turnaround stalls, I'm not protected by some enormous cushion. I could be down roughly 14% from here, waiting, collecting a dividend the company is currently funding with more cash than it generates.

That's the actual shape of this investment. It isn't a fat pitch with limited downside. It's a range where one end costs me 14% and the other end doubles my money, and I have to decide which one I believe.

Here's the link to my updated Model, and original

So on my own method, with my own discount rate and my own margin of safety, the base case says buy at anything under $41. Nike is at $38. That's a buy by six percent, which is not a fat pitch. It's the market and me roughly agreeing, with my thumb slightly on the scale of optimism.

Now let's run it backwards, which is the check I should have done a year ago.

Instead of asking what I think Nike is worth, ask what the market already believes.

At a $57 billion market cap, $2.9 billion of normalized free cash flow, a 20x exit and my 5% discount, the implied growth rate is negative 0.2% a year for ten years.

The market is pricing Nike to never grow free cash flow again. Not to shrink dramatically. Just to stay exactly where it is, forever, and then get sold for 20x.

And here's the version that actually decides it for me.

$2.9 billion of free cash flow on a $57 billion market cap is a 5.1% free cash flow yield.

The 10-year Treasury pays 4.79%.

So owning Nike today gets me about thirty basis points more than a government bond, plus whatever growth Nike manages over the next decade, plus the risk that there isn't any (which I think is de minimis)

So yeah, I'm holding my position in Nike. When more evidence of Mr. Hill's turnaround comes to fruition, I'll consider adding more. But I'll be patient until then (and learn from my mistake).