Analysts warn about the short interest in Nike that is at all-time high right now and, combined with a 20% drop in stock price this year, this is unlikely to bring anything good.
Barron's analysts shared a report on Nike's (NYSE: Nike [NKE]) profile from a financial data analytics company S3 Partners that signalled an alerting level of short interest around the company. Some might say that Amazon (NASDAQ: Amazon.com [AMZN]), yet another company struggling from short interest lately, has managed to deal with a similar situation without significant losses. So why should we worry about Nike?
According to the analysts, short interest in Nike has reached its highest level and currently amounts to $1.9 billion. Nike's short interest has jumped 35% in Q3 and 150% since the beginning of 2016. In addition to that, this result is almost 4 times higher than Nike's average short level over the last 5 years, meaning that there is definitely something to worry about here. And while for Amazon it was just a weak moment, there are some fundamental reasons causing this extreme short interest level for Nike, say the analysts.
For example, Amazon's shares were skyrocketing at the highest levels ever, so dropping 7% due to the short interest was not that devastating for the company. In turn, Nike has already lost over 20% of its stock value this year and has been generally going out of favor. That is why, the analysts are warning about some serious consequences to emerge from the accelerating short interest that investors should be prepared for.
The analysts called Nike "a victim of its own success" as its latest earnings performance was not impressive enough for the world's leading athletic footwear and apparel brand, says Barron's. An 8% growth in revenue, a 12% increase in sales and a 6% net income growth would be good enough for most companies but not for Nike, as its investors are used to far better growth levels.
According to the analysts, the main reason for relatively sluggish Nike's numbers is that the company has been on a peak of popularity for so long that investors stopped taking the "fashion risk" into consideration. In other words, Nike is not ready to deal with a quickly growing competition from Adidas (OTC: ADDYY) and Under Armour (NYSE: Under Armour [UA]) who offer more and more new design solutions that are different from that of Nike and work towards switching consumer preferences away from Nike.
The bottom line is that the growing short interest means that some investors believe that Nike is about to face a further decline in the stock price. The highest short interest level in the last 5 years is definitely a good wake-up call for Nike to introduce a new "game-changing" product as it hasn't done so for quite a while now.