Apple(NASDAQ: AAPL) and Nike (NYSE: NKE) are two of the most iconic American brands. Apple is the country's top smartphone maker and the world's most valuable company. Nike is the world's largest producer of athletic footwear.
But over the past five years, Apple's stock quadrupled while Nike's stock declined more than 10%. If we include reinvested dividends, Apple's stock generated a total return of 313% as Nike's total return was negative 7%. Let's consider why Apple outperformed Nike -- and whether it remains a more compelling investment.
Image source: Apple.
Apple needs to toss more irons in the fire
Apple's revenue rose 8% in its fiscal 2022 (which ended in September 2022), but fell 3% in its fiscal 2023. Declining sales of iPhones, Macs, and iPads offset the growth of its services segment which houses its App Store, iCloud, and subscription services. It still generates approximately half of its revenue from the iPhone.
In the first nine months of its fiscal 2024, Apple's revenue grew by less than 1% year over year as declining sales of iPhones, iPads, and other devices offset its rising Mac and services revenue. However, analysts expect its revenue and earnings to grow 9% and 17%, respectively, for the full year, as its smartphone sales are expected to surge thanks to the debut of the iPhone 16 late in the fiscal fourth quarter.
For fiscal 2025, analysts expect its revenue and earnings to rise 8% and 12%, respectively, as its Mac and iPad sales stabilize, it expands its services segment, and new generative AI features draw more consumers to its latest iPhones. That's a promising outlook, but the stock doesn't look cheap at 30 times estimated forward earnings.
Apple could struggle to meet Wall Street's optimistic expectations. The iPhone 16 is already being discounted on top e-commerce platforms in China, and the company is reportedly developing a new low-end iPhone SE to reach more customers. Its use of a "walled garden" strategy -- creating a closed ecosystem of hardware and services that enhances Apple's control over every aspect of its products and incentivizes users to stick with them -- is also being closely scrutinized by antitrust regulators in the U.S. and Europe.
Apple claims the new AI services it is launching will drive its near-term growth. The company was also sitting on $153 billion in cash, cash equivalents, and marketable securities at the end of its latest quarter -- a cash hoard that provides plenty of room to make fresh investments or acquisitions. Apple is still a good safe-haven stock, but its high valuation, regulatory threats, and overwhelming dependence on the iPhone could limit its near-term gains. It probably won't soar much higher unless it tosses a few more irons in the fire.
Nike faces some existential challenges
Nike's revenue rose by 10% in fiscal 2023 (which ended in May 2023), but has been sliding in fiscal 2024 due to a severe slowdown in North America that offset its stronger growth in China and other overseas markets.
Over the past decade, Nike expanded its direct-to-consumer Nike Direct channel (which houses its e-commerce platform and brick-and-mortar stores) to reduce its dependence on third-party retailers. That strategy initially widened its moat against its competitors, locked in its customers, and shielded its brand from third-party markdowns.
But over the past year, Nike Direct's sales dried up as macroeconomic headwinds throttled the market's demand for its lower-end products. It also struggled to keep pace with faster-growing competitors like On Holding(NYSE: ONON) in the wholesale market. Nike is now trying to rebuild its wholesale relationships with retail chains, but it could take a lot of effort to reverse its slide and grow its market share in that fragmented channel again.
Nike expects the slowdown to continue even as it tries to reboot its business by launching new products, pivoting to a product mix with a larger share of higher-end shoes, and deepening its relationships with consumers through sponsored events and activities. Analysts expect its revenue and earnings to decline by 7% and 28%, respectively, in its fiscal 2025.
That's a grim outlook, but they also expect its revenue and earnings to grow by 5% and 16%, respectively, in fiscal 2026 as its turnaround efforts begin to bear fruit. The company still ended its last quarter with $10.3 billion in cash, cash equivalents, and short-term investments, so it certainly won't run out of cash while it works to fix its business. Yet Nike's stock still seems pricey at 30 times estimated forward earnings -- and it probably won't attract too much attention from the bulls until more green shoots appear.
The better buy: Apple
Apple and Nike both face a lot of near-term challenges. However, I believe Apple will continue to outperform Nike for four simple reasons: It's growing faster, its business model is stickier, it faces fewer direct competitors, and it's still holding a lot more cash. Nike's stock might eventually bounce back, but it will need to rebuild its wholesale business and meaningfully widen its moat against formidable challengers like On Holding first.
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Leo Sun has positions in Apple. The Motley Fool has positions in and recommends Apple and Nike. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.
