The Dow Jones Industrial Average ($DOWI) was in focus late last month after stringing together 13 consecutive days of gains to notch its longest daily win streak since 1987. On a year-to-date basis, the Dow is now up more than 6%. That lags a gain of 17.2% for the S&P 500 Index ($SPX) in 2023 - but after struggling to find positive ground for most of the first half of the year, it seems the Dow might finally be gaining some bullish momentum.

However, not every Dow component is in the green for 2023 just yet. For instance, shares of Nike (NKE) are down more than 6% since the start of the year, completely sitting out a rally in the broader equities market.

The stock's underperformanceisn't totally surprising, as investors have been pricing in their concerns over the prospect of lower consumer spending due to rising interest rates and elevated inflation levels. But as the broader Dow begins to show some strength, and the likelihood of a soft landing for the economyincreases, is now the time to buy the dip in this consumer discretionary stock?

Is Nike stock a buy, sell or hold?

One of the most recognizable consumer brands globally, athletic apparel giant Nike is valued at a market cap of $166.2 billion. In fiscal 2023 (ended in May), Nike exceeded $51 billion in revenue, indicating an annual growth rate of 9.6%. 

The top-line growth was supported by gains "across all brands, channels and geographies,” according to Nike, showcasing the global strength of its industry-leading brand portfolio. Drilling down, sales for the company’s flagship Jordan segment increased by over 30% year-over-year, and it's on track to become the second-largest footwear brand in North America. 

The COVID-19 pandemic pushed Nike and many other retail brands to improve their online presence, and the company's digital customer experience appears to be yielding results. In fiscal 2023, digital sales accounted for 26% of total revenue, up from just 10% in fiscal 2019. Additionally, online sales were up 24% in the last 12 months, propped up by higher conversion rates and order values. 

Despite its already formidable market share, Nike has more than doubled its sales since fiscal 2013. This expansion in revenue has supported a 266% gain in Nike stock over the past decade, accounting for dividends. 

Nike’s generous profit margins allow it to pay shareholders a quarterly dividend of $0.34 per share, translating to a forward yield of 1.3%. These payouts have increased at an annual rate of 11%. With a payout ratio of less than 40%, Nike can easily increase dividends further while strengthening its balance sheet and investing in product development. 

That said, Nike hasn't expanded its profit margins at the same pace. The company reported adjusted earnings of $3.23 per share in fiscal 2023, an increase of 20% compared to 2013. This is partly due to spiking demand for shipping containers during the pandemic, which significantly increased shipping costs for Nike. 

However, the company has since renegotiated contracts with shipping partnersto lower its costs in fiscal 2024. Additionally, Nike projects favorable transportation costs and lower inventory levels to help it increase adjusted earnings by 20% year over year in fiscal 2024. 

Analysts tracking Nike stock now expect earnings to grow by 55% between fiscal 2023 and fiscal 2026, aided by a slowdown in inflation and higher online sales. 

Is Nike stock undervalued or overvalued?

Priced at 3x forward sales and 29x forward earnings, Nike stock trades at a premium compared to some of its peers. 

Rival athletic brand Skechers (SKX), which is growing much faster, is valued at 1x forward sales and 16x forward earnings. Moreover, the average forward P/E ratio for companies in the footwear and accessories industry is 24x. 

In addition to its valuation, another downside to buying NKE stock is its vast size, which leaves it vulnerable to macro headwinds. For example, weakening demand in Europe might decelerate Nike’s revenue growth in the near term. 

What do analysts expect for Nike stock?

Out of the 26 analysts tracking Nike stock, 16 recommend a “strong buy,” three recommend a “moderate buy,” six recommend a “hold,” and 1 recommends a “strong sell.” These analysts have an average target price of $131, about 22% above the current trading price. 

While analysts may be optimistic, there's reason to remain cautious at current levels. Given its relatively stretched valuation, investors shouldn’t expect Nike stock to suddenly deliver exponential gains in the next few years. The large-cap stock may even continue its longer-term pattern of consistently underperforming the broader markets.

Several other apparel companies, including Skechers, are trading at more attractive multiples and look poised for stronger growth and more impressive returns. Rather than betting that Nike is finally due to rebound, it might make more sense to look elsewhere for value plays in the consumer discretionary sector.