Motley Fool Hidden Gems Investing - Nike’s Turnaround Story

Episode Date: May 22, 2025

Turnarounds take longer than investors like to imagine. (00:21) Jim Gillies and Ricky Mulvey discuss: - Nike’s return to Amazon. - The fundamentals and risks of investing in turnaround stories. - A fitness company with a potentially brighter future. Then, Motley Fool CIO, Andy Cross, and Senior Analyst, Asit Sharma, interview PubMatic CEO Rajeev Goel about trends in digital advertising and his company’s future. Members of any Motley Fool service can access the whole conversation here: https://www.fool.com/premium/4056/coverage/2025/05/15/pubmatic-ceo-rajeev-goel-interview?_gl=1*wfzp4p*_gcl_au*MTE4NzAwNDAyMS4xNzQ3OTM0ODk3*_ga*MzY5MTIzMDUyLjE3NDc5MjMyNTM.*_ga_B6G4KMLCV0*czE3NDc5MzQ4OTckbzMkZzEkdDE3NDc5MzkzODQkajU1JGwxJGgzMjk1NDE2NDEkZEpJOEZWXzVabC1XWnV6ZHBicHZxZ0pmcXBubWdVRElrcmc. Companies discussed: NKE, CMG, UHC, BA, PTON, PUBM Host: Ricky Mulvey Guests: Jim Gillies, Andy Cross, Asit Sharma, Rajeev Goel Producer: Mary Long Engineer: Dan Boyd Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, "TMF") do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. Learn more about your ad choices. Visit megaphone.fm/adchoices

Are you buying the Nike turnaround story? You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Jim Gillies. Jim, good to see you. Good to be seen, Ricky. Today's a good day to zoom out. There's some little news going on, but to be honest, it's a little bit of a slow news day. And I think it's a good time to talk to you, especially because you like looking at valuation

stories. And I think today's a good day to talk about turnaround stories, especially with Nike, where Nike CEO Elliot Hill is now trying to appeal to retailers again after the previous administration focused on a direct sales route. Here's the newsy hook. Nike is back to selling its products on Amazon. This is five years after pulling its products from the e-commerce giant. So we'll get into the turnaround story, but what do you think of this move? Nike's move to reverse course on direct sales and say, Hey, actually outside retailers are good at selling our shoes and apparel. I'm going to put it, uh, kind of what Winston Churchill said, uh, way back in the day. It's nice that Nike does the right thing after trying all the other

alternatives. It was dumb to pull it off. I mean, it's only the biggest online marketplace in the world. Why would you want to sell your products through there? I mean, who knows, right? In other news, why would anyone want to sell in Costco, for example, or through Walmart? Because why would you want that kind of relationship? And I have fond memories of looking at Foot Locker after Nike pulled kind of the same thing. We're going to emphasize direct-to-consumer sales, so we're We're going to sell less through Foot Locker. And Foot Locker, of course, is now in the process of being taken over by Dick's Sporting Goods, you know, and so Foot Locker had some, you know, long, dark tea times of the soul

there before basically striking things with like deals with Adidas or Adidas, depending on, you know, how pretentious you want to sound and, you know, and kind of got on with their business. And so with Nike kind of deciding they could do it themselves and trying to disintermediate people and trying to take the profit for themselves. Now, they're coming back, scrunching back to people. Thank goodness it hasn't been a complete and utter failure. I know we're going to really drive towards turnaround stories. This is an iconic brand. It's an iconic company with products and athletes that people identify with. Obviously, Michael Jordan, Tiger Woods,

and various lesser beings as well. This is a company that maxed out. It's been, I think, three, three-and-a-half years since it topped out. I know we're going to go down the turnaround thing. One thing I'm going to say about when you are playing in turnaround stocks, realize most of the time turnarounds take a long time to turn around. That's not a unique insight. Peter Lynch said that and i think uh one up on wall street which was published in what 87 or something like that uh you know like turnarounds take a while and i mean nike's shed almost two-thirds of its value over the past four years and now i mean have we have we made the turn yet i'm not entirely sure and nike is also in a tough environment to turn around announcing that it's going to hike prices

on June 1st. The company did not mention tariffs, but CNN reports that they just said, we are regularly evaluating our business and making pricing adjustments as a part of our seasonal planning, end quote. Jim, I think we're going to see a lot more of that, especially from retailers. Just we're not going to put blame on anyone, but we are going to raise prices coming into the summer. Well, that's the lesson of Walmart and President Trump jawboning them down last weekend, right? I mean, the second they say, well, our costs are higher, so we're going to have to pass along the costs caused by tariffs, and they got spanked. And the signal that sent was, okay, everyone else who is also going to raise prices, everyone's going to do it. Come up with

literally any other explanation. Don't blame, you know, it's going to happen and people are going to have to pay for this just don't point blame in the general dc area is all so i look i mean they've also of course you know if they're gonna do price hikes i mean part of that's you know you gotta pay the amazon vig now too right so i mean that's part of it but no i think uh it's going to be interesting times for for for nike in this uh in this new um higher cost environment. I'll leave it at that. And it's also incredibly difficult for a brand to come back from being a discount brand back to, we're going to sell you things at full price again, because you've trained your customer base to wait for the discounts to come.

And then good luck to you if you can stop that game. It's incredibly difficult. I don't want to discount Nike's ability, but there's also a pricing game that's going to be tough for them. 100%. Yeah. Let's talk about the turnaround story itself. It is difficult for companies to turn around. Nike has the Win Now plan, which is focusing on retail partners, as we mentioned. There's some focus on brand. There's a shakeup in the technology division. You've seen a lot of turnaround plans, and it's easy for investors to get excited about them, to want to hop on board and see an undervalued stock and get on that train. So, what do you specifically think of Nike's Win Now plan? I don't know what to think about the Win Now plan. I will say I've seen

various other win now. I guess no one could see the air quotes, so it was wasted motion. I've seen other turnaround plans. And we remember the ones that work and the ones that don't work tend to disappear into the ether along with the executives that trundled them out. I have very fond memories. This is a technology space. This is a few years ago. Someone had come from a very high-profile technology company. We'll just put it that. And I saw a presentation from them, which was their version. Again, the technology space, it's not important who it was, but the plan, they stood up and spoke very confidently about their version of the Win Now program, how they're going to win back customers for the technology products that

they were offering. I remember watching this and really noting the enthusiasm of the executive who had come over from a much larger company and how much deference he was being given in the room because, you know, this guy was a very, very important executive from a much larger company than us now. And I think the plan and the person lasted less than 18 months, you know, and no, I'm not talking about Pat Gelsinger and Intel. We have seen this story before and the principles that I have when looking at turnarounds, any turnaround. First of all, turnarounds are difficult and a lot of time turnaround doesn't happen. And it's not that the company turns around, it's the company turns around on the person who's trying to drive the turnaround.

and we go get the latest, you know, savior. But the second thing is, it's probably going to take you a long time and longer than you expect. So, you have time to go into a turnaround story. You have time to kind of, you know, maybe gauge a few quarters. Don't even throw any money at it or throw, you know, 0.1% tiny starter position just to make sure you keep paying attention. In my career, when I've looked at, like, I give you a couple other turnaround scenarios. Right now, there's a lot of people getting very excited about UnitedHealth Group, which has fallen like 50% in a month or whatever it is. There's a bunch of executives who have committed capital in the open market and everyone's, yay. You know what? Let's just see how this plays out. I'm going to

point you in the direction of Boeing as well, which those two, the two airliner crashes of the MAX 737 MAX, which kicked off a lot of the problems with Boeing. Those were in late 2018, early 2019. and uh people were rushing in in 2019 and 2020 it's like oh this is one of the great american success story companies it's a intrinsically required company in the defensive and the defense industry as well as in the uh the airline it's part of an airline duopoly um if you rushed in in the first year of that boy you've been waiting a long time for your money you know and and even like i mentioned earlier with nike nike's nike's probably three years into their turnaround I'm not sure they're going to turn yet. Certainly, if you look at expectations,

this is a company that as recently as 2021 had revenue growth over 20%. It's going to decline this year. And if you believe consensus estimates, it's going to decline next year and going to decline the year after. One of the bigger turnarounds, I think, or one of the turnarounds that actually turned that I can appreciate is Chipotle. Chipotle in 2015, a very, what's the phrase? Very bad, terrible, awful year. They kept giving people food poisoning. Well, in various locales and different types of food poisoning too. It's nice that they went for diversification. You don't like E. coli, no problem, we've got norovirus. By the time you come along in 2016, the stock had already been knocked down by about 40% or 50%. You come along

in mid-2016, it's like, okay, like, you know, valuation's much better. They've still got good growth plans. They've at least paid lip service to improving the quality. We understand why they had a lot of the foodborne illness issues that they had. Ironically, a lot of it was tied to their whole food with integrity thing where, you know, you can't get one type of potato to make your potato chips or your make your french fries like mcdonald's does where they have a very specific french fry you know specification and they go everywhere like a lot of it was because local local farms has had tainted lettuce and they tried to do local so but uh you know you come in about you know mid 2016 you know you're you've well cleared the the 50 drop and you know the

they they've paid lip service they've closed the stores to do a proper clean at everyone they introduce more, more, um, you know, training and they, they, they, they come out and say all the right things. It was still dead money for another two and a half, almost three years, you know, and it was only after founder Steve Ells is gone and they bring in Brian Nickel from, from Taco Bell, which is still hilarious to me, you know, only then did Chipotle have its Renaissance and it's done very, very well, but you know, the people who ran in, in the first couple of months, uh, you know, probably paid more than they needed to. And they were very early. So I look at a nike and go okay we're about three years into this is any of the moves they're doing to gain

traction i don't know but i'm still like yeah you know what i'm still taking my time because i'm not sure there's a lot going on elliot hill came in as ceo in 2024 as john donahoe who is there from 2020 to 2024 so he is not you know the new leadership has not had three years to really implement a new plan it's it's it's been less than that jim it doesn't sound like you're interested in Nike. I'm not getting you to bite on Nike. It's, it's at a historically low multiple. It's like 20 times earnings for an iconic brand. I think that, you know, I would bet that in 10 years from now, 20 years from now, people are still buying Nike shoes. Now to what degree that is, I have no prediction, but you're not biting on Nike. These things are difficult. Are there

any current turnaround stories that are, you're more interested in? I know you like looking in the dark corners of the market where not a lot of other people like paying attention, but when you grab your flashlight and search around the attic are there any better better situations for retail investors than nike right now oh i'm gonna give you one that's gonna get me some grief but that's okay because i you know i i i live on grief and tears so that's good in the spirit of trying to of charlie munger's try to destroy a cherished belief at least once a year a company that I very publicly mocked on Fool 24, Fool Live at the time, called out their now former CFO as being, I'll say suboptimal. I said nastier things, but that's okay. If you had told me that I would

be an owner of Peloton today, I'm not sure I would have believed you. But the whole concept of Peloton is post-COVID, because Peloton spent the COVID bubble completely overbuilding and pushing as far away as possible any suggestion that they were nothing more than a COVID growth story. No, no, no, we're fine. Of course, they overbuilt all of their fitness gear, which is very low margin, as opposed to their subscription business, which is very high margin. They plowed all their capital into their treadmill and bike business and then had to sell it at just brutal discounts. The CFO, again, had no idea what the F in her name meant. She very publicly said, we have no need to raise capital 12 days before the company raised a

billion dollars in capital. When the CFO doesn't know what's coming, you don't exactly engender optimism in that they know what the hell is going on. But flash forward to today, The froth has been largely cut. The people who were intent on empire building are gone. They have hired a guy who, on paper, looks great. He comes from Apple Connected Fitness, was one of the pioneers there. That's the new CEO. He's been a Peloton member since 2016. Himself, some subscribers, so he uses the product. It basically boils down to the new management finding and nurturing the real business hidden underneath this COVID-era empire excess. Of course, Peloton was down 99% at one point. This has been bombed out. Why would anyone go here?

Well, if you look at the last three quarters, they have beaten and raised their guidance each time. You look at the full year quarter, They have a June fiscal year, so they're three-quarters into fiscal 2025. They came into fiscal 2025 with a prognostication of various things. The main things I'll say is adjusted EBITDA of $200 million to $250 million and free cash flow, which is not something this company was familiar with for the last couple of years, generating at least $75 million in free cash flow. after one quarter so that was that's what they came into after one quarter they bumped their guidance up and you know the free cash flow guidance became at least 125 million after two

quarters again bumped guidance up and cash flow became at least 200 million for the year uh after the third quarter and by the way after three quarters they've actually done 211 million in free cash flow which is again kind of not what people were expecting from uh the corpse of of peloton uh this most recent thing is they're going to do free cash flow in the vicinity of 250 million dollars so they've already got you know 211 like i said they are now trading for about 13 times at least as of a couple days ago i've looked at today trading at about 13 times free cash flow they have 1.5 billion in debt and some of it's very expensive debt but you know i think they're going to pay it off fairly quickly they got 1.5 billion dollars in debt with about

$900, $910 million cash against it. They're going to take out about $200 million in convertible debt, which matures next year. That'll be gone. Probably going to take out a couple hundred million dollars on the credit line, which is a very high interest rate. When they do that, it'll automatically drop their interest rate down. So now you've got another engine contributing to the cash generation story. They're really focused on keeping the subscriptions that they have now. They've de-emphasized the hardware model. And I just look at this and go, I think Peloton not only can be a multi-bagger from here or here being six dollars when i was looking at it fairly recently i think you could have i think you could see a world in less than five years where peloton

goes from six to you know 25 to 30 and it's bought out during that interim and so i'm i'm more interested in that kind of a turnaround where like the bombing happened and it's just rubble everywhere rather than the fits and starts at like at a boeing at a nike um at an intel i mentioned Pat Gelsinger earlier. I'm more interested in, I want to see blood in the streets from my turnaround target. Then I get interested. I don't see that with Nike. And importantly, free cash flow. You used a free cash flow metric for Peloton. That means that company is generating a profit. For listeners making sense of that word salad, that's a great place to end it. How about that? Jim Gillies, thank you for your time and your insight. Appreciate you joining us on Not With Full Money.

Thank you. What does a more open internet mean for ad sellers? Motley Fool chief investment officer, Andy Cross, and senior analyst, Asit Sharma, interviewed the CEO of Pubmatic, Rajiv Goel, on our Fool 24 live stream. We're just going to play a portion of the conversation where they talk about ad buyers' shift to streaming and what investors need to know about this ad seller's future revenue growth. Rajiv, one thing we love to dig in through is really the competitive advantages of the companies we invest in and we follow, and Pubmatic is a recommendation across many

of our services. I want to talk a little bit about Activate, Convert, and Connect, just some of the new initiatives you've brought to the platform, especially tied to AI, but really as you're looking to serve different parts of this market that is just all blending together with all the different players that are connected into serving advertisers to consumers as the advertising market is not just growing, but as you mentioned, really evolving towards more programmatic spend? Yeah. I think the great thing about our platform is how we connect all of these different segments of the market together so we can enable their businesses and enable them to transact. Convert is our commerce

media platform, I gave a couple of examples earlier of Instacart data, for instance, is available on our platform. If a marketer wants to target people that are shopping for specific products, or maybe it's a conquest where you say, okay, if they bought Campbell's Soup, then we want to show them an ad for the alternative. But Instacart doesn't have a huge amount of digital ad inventory in that people go on Instacart and they purchase their basket groceries, but then that data can actually be applied outside of Instacart itself. We can extend the value of that data. Now, streaming inventory is a great place to extend the value of that data. We can play on Instacart data onto, let's say, Roku inventory. That's a huge win for everybody

involved in that process, including the consumer, by the way, who's going to get a much more relevant ad as they're watching content on Roku. The beauty of our platform, Convert for Commerce Media, Activate for Buyers, we have a core SSP for publishers, and then we have a product called Connect, which I'm sure we'll get into, Andy, which has to do with curation and sell-side targeting. More and more, this targeting is moving to the sell side of the ecosystem rather than the buy side. We can bring all of these pieces together to enable a customer to very efficiently and with a high degree of performance drive the transactions and the outcomes that they want to drive.

Rajiv, I wanted to ask you a question about where advertising is going in the current macro environment and maybe some longer-term trends. I think you've peripherally touched on this as you've been talking. In your last earnings call, you mentioned a shift in marketing funnels from top of the funnel activities to lower-level activities. If advertisers are shifting from brand-building activities to more performance marketing, how does this benefit Pubmatic, and how are you all positioned to help advertisers go a little bit lower down the funnel? There's no doubt that there's a degree of uncertainty out there, U.S. trade policy,

tariffs, all that kind of stuff. That is causing some unease. The good news, from my perspective, is, having been doing this as long as I have, we've managed through multiple economic cycles. We've seen this playbook of, when the cycle shift happens, how does that play out into advertising? The good news is that advertising always comes back bigger and better, and in particular, digital advertising. Advertising has been around for hundreds of years and it's not going away. What typically happens is, the underlying shifts that were happening maybe slowly in the ecosystem, those get accelerated. A couple of things that I'm anticipating. Number one is, I think we're going to see a more pronounced shift of dollars from linear TV into streaming. No secret that,

obviously, the eyeballs have shifted into streaming. The COVID pandemic was a big accelerant for that. But new households that form, if you're in your 20s or your 30s, nobody's subscribing to Comcast or something like that. They're all going for streaming. and so the eyeballs have shifted but the dollars have lagged right and so right in the middle of the up fronts right this is when the big you know tv companies the broadcasters and the streamers they go and they present you know what's their content slate and try to get advertisers to commit you know big budgets and i i would think and when i talk to advertisers and agencies i'm hearing you know who's willing to step up their commitment you

know given the uncertainty particularly because if you don't buy in the up front there's what's called the spot market, right? That's the real-time market where you can buy without having made a commitment. And so, the spot market is available to you. So, I think we're going to see a lot of dollars move into the spot market, and in particular around streaming. And spot tends to be much more heavily programmatic-dominated. And so, we think that's a big upside potential for us. The second asset is what you mentioned around performance. So, the other thing that happens is usually a CFO is now getting into the CMOs here and saying, hey, we got to make sure every dollar of ad spend is super accountable. We need to know granularly what's the ROI. Otherwise,

it's potentially on the block for being cut. That means that I would expect to see a shift of ad dollars from brand orientation towards performance. What does that mean in terms of performance channels. CTV is a performance channel. Commerce Media is a performance channel. You have closed-loop reporting, the ability to measure what kind of sales happened. We have a lot of advanced data and targeting. I'm sure we'll talk about cookies, but there's been a big transition, and we've been a leader in that transition away from cookies. It's a lot more advanced data, like people logged in. I think we're in a good position to be able to manage through that shift for our publishers to drive more performance ad spend.

Then, I think the third thing we're going to see, actually, I'll give you two more things. The third is more supply path optimization. If your CFO comes to you and says, hey, we're going to have to ratchet back the ad spend by 5%, 7%, 10%, then the first place you're going to lean to is to say, well, how can I protect actually the media spend, but how can I get more efficient? But how can I take cost out of my supply chain, out of my buying process? And supply path optimization and our activate solution with its AI capabilities is a great way to do that. And then lastly, I think we're right at the cusp of this AI revolution, right?

And so, usually what happens in a macro cycle is people are much more willing to try new solutions, right? When you're making 100%, 110% of your plan, your motivation to try something new is very low, right? it's like, hey, why rock the boat? But if you're coming in at 80% or 90% to plan, if you're a publisher or an advertiser trying to drive your sales, then all of a sudden, you're willing to try new things. And I think there's a lot of AI solutions out there in general. But we've been doing a lot in AI, our new buyer platform that we announced last week

with AI-driven workflows. So I think we're going to see an acceleration of interest and trial you know, a lot of these new AI solutions. Rajiv, we've talked about a lot of technological advancements and potential tailwinds up until now. We're about halfway through. So, before we jump into questions about AI, I want to draw everything together. Can you give us, from a financial perspective, sort of a sense of the revenue CAGR we should be expecting, shareholders should expect, let's say, over the next three and then maybe five years? Sure. So, I'm happy to share what I can in terms of forward-looking projections. Let me give a little bit of context on the business just from the last couple of quarters. In May of 2024, almost exactly a year ago,

one of our large DSP buyers, they made a technical change to how they bid. I won't go into too many details on it, but they went from first and second price auctions to really managing first price only. And so, that was a significant headwind for us. At the same time, we saw a nice tailwind in political ad spend, right? So, obviously, last year, presidential cycle, big cycle, so there was a lot of political ad spend, particularly in the second half of the year. So, there's a lot of noise in the numbers right now. And so, what we started to do middle of last year is just to break out, if you look at our business, excluding that DSP and excluding political, so the put and take, what does the growth in the business look like, so that investors could get a clear picture

of what is the underlying business, how is it performing. That underlying business, by the way, is about 70% of our revenue, so a very significant chunk of it. In the second half of last year, that underlying business grew 17% on a year-over-year basis. Pretty good. That growth accelerated in Q1 to 21%. We're seeing a really nice trajectory in the business. Our reported revenues, the entire business, they've been uneven, right? Uneven because we took that hit in Q2 of last year, and that persisted into Q3. And then we had uptick from political, so Q3 looked pretty good, and Q4 came back down. So, when you look at the total kind of reported numbers, there's some unevenness. We are really targeting to grow at over 15% per

year on a sustained basis. When we look at our underlying business again and the trends there, with that 21% growth in Q1, and we think about even in the near-term with the macro uncertainty, we think we can continue to grow at that rate, at that 15% plus rate. I think there will be quarters where we're above that. But I think that 15%-ish is a good number. For us, the market is also, you know, our market is growing in the 8% to 10% range, you know, digital advertising, programmatic digital advertising. So that 15% also implies, you know, sustained market share growth. I'll put a link to the whole interview in today's show notes,

which members of any Motley Fool service can access. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against. Don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.