In yesterday's e-mail, I shared how Swiss athletic shoemaker On (ONON) is facing heavy discounting from competitors, which On refuses to match.
That's evident from the pricing of its Cloudmonster 3 shoes, for example, which are a hefty $190. I'm willing to pay that price once a year or so (as they wear out) because I really like how they look and how versatile they are.
They're usually the only shoes I travel with because they look nice enough to go to a conference or out to dinner, but I can also wear them jogging, hiking, working out, or walking around a city all day.
But more and more low-price competitors are emerging. For example, my dad likes my Cloudmonsters, but he ended up buying these knockoffs (made in China) for only $45.99 on Amazon – 76% less than mine.
It's bad news for On that it's hard to tell the difference between them at first glance (Cloudmonster is on the left, and the knockoffs are on the right):
As a result of this rising competition – plus a broader slowdown in footwear sales – On's once high-flying stock is down 58% from its all-time high.
So today, let's take a look at the company's historical financials and valuation...
The company has seen extraordinary growth in both revenues and operating income:
However, if we look at year-over-year ("YOY") growth by quarter, we can see a substantial slowdown:
Note that operating income, while also slowing, is growing faster than revenues. That's because On has refused to cut its prices, leading to rising margins:
On's free cash flow ("FCF") grew sharply starting in mid-2023, but has been mostly flat since then:
Normally, I would include a chart here showing how On spent its FCF – typically on acquisitions, dividends, or share repurchases. But On hasn't done any of those things, so its cash has simply grown:
Overall, this is a very strong financial picture. On has developed unique and stylish products that have been very popular, driving strong revenue growth. And it's able to charge premium prices, translating into even faster growth in profits and FCF.
Investors responded with enthusiasm, valuing On's shares at 35 times to 50 times forward earnings for most of its history as a public company.
But as growth has slowed, investors are questioning whether On can maintain strong revenue growth and high prices.
As a result, at yesterday's closing price of $26.76 – close to a three-year low – the stock is trading at 19 times this year's earnings estimates and 15 times next year's.
This is the lowest forward price-to-earnings (P/E) multiple ever for the stock, as you can see in this chart:
Are investors overreacting to a short-term slowdown, in which case the stock is a buy?
Or are they appropriately valuating the stock, reflecting slower growth going forward?
Or could On be heading toward real trouble, as peers Lululemon Athletica (LULU) and Nike (NKE) have experienced – in which case investors are underreacting and the stock should be avoided?
If you have any thoughts about this, I'd love to hear from you – you can send me an e-mail by clicking here.
Best regards,
Whitney
P.S. If you're in New York City on the evening of Thursday, October 1, I'll be at the 16th annual Take 'Em to School Poker Tournament for charity. It starts at 6 p.m. at Gotham Hall, located at 1356 Broadway.
For the sake of disclosure, I'll note that this isn't a Stansberry Research event. It benefits Education Reform Now, a wonderful nonprofit organization I co-founded two decades ago that's committed to ensuring all children have access to a high-quality public education, regardless of race, gender, geography, or socioeconomic status.
It's a first-class event featuring numerous athletes and celebrities, poker players battling for fabulous prizes, and cocktail guests enjoying great food, a variety of casino games, and entertainment.
It's a lot of fun, and for any young person in – or looking to get into – New York's finance community, there's no better networking event. There are hedge-fund titans at nearly every table. Here I am last year with Boaz Weinstein of Saba Capital, one of the event chairs:
Poker tickets are pricey at $3,000 for a single seat, but cocktail tickets are only $300. You can buy a ticket on the website here (and maybe at the door if we're not sold out).
If you come, be sure to say hi!