David Butler, The Motley Fool
·4 min read
Down 8% at the time of writing, On Holding AG (NYSE: ONON) was in the news this week after reporting its full year and Q4 results for 2023. After incredible sales momentum through the last few years, On's Q4 report failed to impress investors, as the stock was down more than 14% at one point post-earnings. The question now becomes, does the lower pricing make On a buy?
The running shoe company had been making waves for not just growth, but also for being profitable early in the game. The fourth quarter bucked that trend a bit, with a reported loss of $30.3 million, or $0.09 per share. Revenues of $504.7 million also came in below many estimates, contributing to the stock pulling back.
For the full year, the company had earnings of $0.28 per share, and revenues of $2 billion vs. $1.28 billion in 2022, or a 56% gain based on US currency.
A balancing act
What we're seeing this week is the volatility that is associated with a stock that was running at such a high multiple relative to its earnings. The stock was trading at a P/E Ratio of roughly 120x its earnings prior to its Q4 report.
That kind of valuation usually means that it takes more good news to create upside potential, while any bad news or missed expectations will most certainly create more downside pressure on the stock. Back in November 2023 for instance, the stock fell after reporting an earnings beat, and improved full year guidance. This is the trade off on holding a growth-oriented company like On Holding. The long term potential is there, but investors have to be able to stomach the roller coaster ride along the way.
The missed estimates clash with what has been a pretty impressive story, and no doubt has investors torn on the share price. How often do you find a company averaging annual sales growth of over 60% (in US dollars)? From 68% in 2020, to 75% in 2021, and 61% in 2022 -- these are numbers that most companies would dream of.
It is worth noting that management pointed out that the company's full year 2023 results did beat the initial estimates at the start of the year, and the company doesn't seem to have lost its enthusiasm about future prospects. The fourth quarter report also noted that direct to consumer (DTC) is becoming a bigger piece of the business, which helped drive gross profit margins to over 60% on a Swiss Franc currency basis.
Of course percentage growth rates do tend to decrease as company's get bigger, but Guidance for 2024 is still calling for a sales growth rate of 30% based on a constant currency basis in Swiss currency.
Buy now?
For those monitoring the stock, it did in fact rally after its initial 14% drop Tuesday morning. Again, this showcases the volatility, and also the positive market sentiment on the company. I view pullbacks as a buying opportunity for this stock. Long term, the company's growth, and outlook for its strengthening direct-to-consumer business remain intact.
This seems like a company that has itself together. Annual revenue growth remains impressive, even though it underwhelmed based on estimates, and the shift to annualized profitability shows that unlike many growth stocks, On Holdings management is intent on running a business focused on actually creating value for shareholders early in the life cycle.
Despite the high valuation, this could be just the sort of business to be involved in for long-term oriented investors.
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David Butler has no position in any of the stocks mentioned. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.
Is On Holding Stock a Buy? was originally published by The Motley Fool
