Stock of the Month: Is Adidas beating Nike?

Adidas (ADS.DE) shares are down 11% in 2025 despite the company's strong earnings recovery. Investors are keeping an eye on the tariff environment and the weakness of the sector in both China and the United States. However, the brand's strong momentum could surprise the market.

The weakness of the sector remains present

In the United States, consumers are reducing their spending on sportswear, and the sector is noticing. The trend has been negative since the end of 2023, and this is compounded by the weakness also being faced in China.

Meanwhile, in China, we're already seeing brands achieving healthy growth, such as Adidas. Meanwhile, Nike continues its free fall, while Lululemon faces slowing growth. This is causing other companies to struggle to develop their brands, such as VF with Vans. This also affects margins, although Nike is still able to maintain a stable operating margin there. Adidas is managing to increase them thanks to operating leverage and revenue growth.

Adidas's business model

Adidas divides its business into three segments:

• Sneakers: This is the most important segment for the company, accounting for around 60% of revenue, and it sets the pace for the rest of the segments. Currently, the most successful launches are the Samba and Gazelle, which are benefiting from economies of scale. Other very successful launches have been the Predator and F50 in soccer, while the Adizero and Ultraboost in running. The segment has barely grown 1.5% annualized since the end of 2018, although in the first quarter of 2025, it grew by 17% and appears to be starting to gain momentum.

• Clothing: Focused on sports and urban fashion. It taps into trends in the sneaker segment. This segment has barely grown since 2018, while in the first quarter it grew 8% year-over-year. It represents around 30% of revenue.

• Equipment: This is the least significant line and complements the revenue of the two main segments. It has seen the greatest growth since 2018, with an annualized growth of more than 5%. However, it still has little impact on Adidas's bottom line.

Adidas sales and production channels

Adidas is heavily focused on continuing to develop its retail channel through other companies, such as JD Sports. Given this, Adidas continues to fight for a position in the top shelves, something it has achieved against Nike, which had been pursuing the opposite strategy.

For its part, Adidas has managed to maintain revenue from its own channel, despite the significant reduction in its own concept stores since 2016.

Regarding production, Adidas outsources all of its production to third countries, with Vietnam, Indonesia, and China being the main countries. These account for 27%, 19%, and 16% of total production. In the current context, this poses a serious threat, as the tariff increase will lead to higher costs for the company.

Valuation of Adidas shares

Adidas's growth in recent years has been disappointing, with growth of just 1.6% since 2016, and revenue growth virtually flat since 2023. This caused profit figures to suffer, with margins deteriorating. Operating leverage had a significant downward impact, with distribution and advertising costs increasing significantly relative to revenue. In 2024, the situation reversed, and in the first quarter of 2025, revenue growth was 12.7%, while earnings per share rose 154.1%.

Therefore, we estimate that Adidas could experience annualized revenue growth of 8.8% over the next five years. We believe the margin will also expand, although not significantly due to the potential increase in labor in the territories where it produces and the impact of tariffs.

For the valuation of Adidas shares, we used a discounted cash flow with a 10% discount rate and 4% perpetual growth. The valuation multiple was based on an EV/EBIT of 21 times. This gives us a potential discounted cash flow for Adidas shares of just 7%, while the multiple valuation shows no potential.

We remain open to price target revisions given the company's continued guidance improvements through 2024, but we prefer to remain cautious initially.

Javier Cabrera, analyst at XTB