The shoe company is growing rapidly, but shareholders’ expectations may simply be too high.
It’s an interesting time for the sports apparel industry. A few massive companies, like Nike and Adidas, have ruled the space for years with product lines that cover a broad range of sports and activities. Recently, however, the big players have been challenged by upstarts and specialty brands like On Holding (ONON -0.76%).
On, based in Switzerland, exploded onto the scene with its shoes aimed at serious runners. The shoes incorporate advanced technology with a distinct look that differentiates them from the competition. There is no mistaking an On shoe, and the company has made a big push into apparel too.
As Nike cedes shelf space and its stock falls, On is growing rapidly. Its share price has followed suit, up nearly 70% year to date. Is this bullish run sustainable? Where will On be a year from now? Let’s take a look.
On is delivering huge revenue growth and looking to expand
On’s top line has more than tripled in the past three years. It reported 28% year-over-year growth in Q2 2024 with revenue of 567.7 million Swiss francs, or $631.7 million. Below, you can see the company’s growth compared to that of some of its closest peers.
Data by YCharts.
On is seeing strength across its product offerings and markets, with a huge boost from its expansion into Asia. This market saw currency-neutral revenue growth of 85% last quarter.
Nike built its image on the success of its sponsored athletes, particularly Michael Jordan. This gave it the edge for years in public perception, but On has also managed to successfully blur the lines between sportswear, fashion, and culture. Athleisure is nothing new, but On seems to be maintaining its high-performance edge while expanding its cultural impact. One key partnership is with actress and fashion icon, Zendaya, who will be part of a creative campaign for the company called “Dream On.”
Despite its growth, On is not without challenges
For On to be a winning long-term investment, it must keep growing, and rapidly, to sustain its premium valuation (more on that later).
That rate of growth is difficult for any company, but On is a high-end specialty brand, and its core market is somewhat limited. If On wants to meaningfully move beyond the athletic performance market and capture a broader consumer base, it faces the risk of diluting its brand and losing the thing that makes it special.
Furthermore, consumers tend to restrict their spending on items they see as luxuries during economic downturns. If there’s a recession, On’s revenue growth may be in trouble.
On Holding’s valuation is in the stratosphere
So where will On Holding’s stock be in one year? Well, it’s impossible to say for certain, and I’m not in the business of setting specific price targets, but I’ll say this: On’s valuation should make you pause. Currently, the company has a price-to-earnings ratio (P/E) of 85. That is more than four times higher than the valuations of industry leaders Nike and Lululemon. To really put things in perspective, On sports a higher valuation multiple than Nvidia did at its peak this year.
The market seems to believe the price will be justified by the company’s future growth, or at least that’s the idea. But at these levels, I don’t think now is the time to buy the stock. This is an impressive brand growing its reach with consumers, but its valuation is just too high, leaving investors with little margin of safety. Shares could tumble and underperform the market at the smallest sign of trouble.
Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica, Nike, and Nvidia. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.