Key points
- ON Holdings had a solid quarter but missed estimates and led weakly, sending shares toward critical support.
- Analysts defend their targets and ratings, suggesting a recovery will begin soon.
- Nike and Lululemon will report soon and may have weak relationships, but one market is pricing in the weakness while the other is not.
- 5 stocks we like better than ON
ON Holding NYSE: ONON the stock price fell 15% following the fourth quarter results and presents a solid buying opportunity. The move is alarming and could impact price action in the short term, but technical and fundamental factors suggest that prices will rise over time.
These include the company’s sustained growth and profitability; another is the extremely bullish sentiment of analysts. They rate the stock a Moderate Buy and have supported the price action over the past year, raising their price targets and leading the market. They may reset their targets now that the guidance is in, but sentiment is unlikely to change or begin a sustained downtrend.
ON Equity growth slows: hyper-growth is over
ON Holdings’ strong quarter is highlighted by sustained double-digit growth, improved margins and positive guidance, but there’s a serious problem. While up 22% year over year, revenue growth is slowing compared to last year and remained below consensus by a solid margin. This is causing the market to revise its expectations, but it is not enough to change the company’s trajectory. Growth is still coming, just slower than the market had previously anticipated.
The news on margins is the same. The company maintained another quarter of positive EBITDA margin, but margin pressure is present and results are weak compared to consensus. Adjusted EBITDA grew 16%, 600 basis points less than revenue, leaving adjusted earnings at $0.06 or less than half of what the Marketbeat.com consensus expected. Currency conversion played a major role, reducing profits by 900 basis points, and is expected to weigh on results this year.
The driving is also the same. The company expects another solid quarter of growth for the first quarter, in the 20% range, but growth is slowing significantly from last year’s hyper-growth pace of 90%. The forecast is also below consensus and calls for a flat margin.
Analysts defend targets: ON Holdings has 25% upside potential.
The first analyst work to hit the net comes from Telsey Advisory Group, which reiterated an Outperform rating and a $37 price target. The Outperform rating and price target are above the Moderate Buy consensus and $35 target, implying an upside of 25%. The bottom line is that sentiment took a hit with the fourth quarter results and guidance, but it’s holding up.
Assuming there are no significant differences in subsequent revisions, investors can expect a rebound in ONON stock sooner rather than later. The market is already showing support at the critical level and could soon turn into a solid buy signal.
Nike and Lululemon will report in two weeks
Nike NYSE: DI AND Lululemon Athletics NASDAQ: LULU report and will provide another catalyst for the specialty apparel/footwear market in two weeks. However, since market expectations towards them are mixed, the impact of the catalyst could differ significantly
ONON’s results suggest weak outcomes for both, but only one market is pricing in this possibility. Nike stock drops significantly in 2024 due to negative analyst pressure, while Lululemon analysts place it on the hottest list. The twenty-nine reviews of Nike revenue and earnings tracked by Marketbeat are all negative, predict a year-over-year contraction, and may have overestimated the weakness. It is set to bounce, providing a solid ratio.
Lululemon’s earnings and revenue estimates have only been revised upwards and is expected to see solid growth. Given a strong ratio, the stock price could continue to rise, but there is a risk. This market is trading below a critical resistance level and at a high valuation that could limit gains until the end of the year if results are not better than expected. Analyst sentiment is firm, but upward revisions to the price target are unlikely without better-than-expected results, and the consensus aligns with critical resistance.
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