Is On Running The Next Nike?

 Price Target: $35 (20% upside)

Current Price: $29

Target Date: Q2 2024

Stock: On Running ($ONON)

On the heels of Nike hitting some mild headwinds amidst their masterclass in running an advanced brand in this economy, let's take a look at the other side of the equation. 

Our analysts have been keeping an eye on DTC wunderkind On Running ($ONON), which is a swiss running shoe powerhouse that has done nothing but accelerate in the last year and a half since its testy IPO at the height of the market.

ONON started as an innovative running shoe company in Switzerland. However, as they have expanded into a worldwide DTC powerhouse, they have begun to become a full-stack athletic brand covering the full spectrum of apparel. 

Sure, despite its endless profitability, ONON only declined in the first stage of its IPO. However, after key product launches and a brilliant expansion of their brand, On Running has completely broken containment on the back of a blockbuster earnings call. 

A stock like ONON gives us a lot of confidence for the DTC apparel market moving forward.

Their worldwide expansion has not led to a massive increase in costs (aside from an incredibly minor slip in gross margins). But now they are at a scale where their profits actually count and can't be chalked up to the simplicity of being a smaller brand.

With growth at an astounding 68% YoY for an $8 billion brand and EBITDA holding strong at 13% -- we have no choice but to love this company. 

Furthermore, the stock has experienced a little pullback in the last week after an immense buying spree kicked off on the back of its 2022 annual report. This is the right moment for us to go long with ONON and see just how far they can run this boutique branding. 

We love the stock, and we love their slightly more conservative guidance as well, meaning the market is eagerly pricing in a slowdown that may never come. 

There's a lot to be excited about here, even if you didn't get in on them during their big Q4 slump. Let's get into it 👇 

On Running Overview:

Okay, to make it quick -- On Running is a swiss running shoe brand that kind of took over in the last 5 years. T

hey rose to prominence on a new kind of cushioning that looks distinctive and allegedly does better at maintaining performance and comfort than traditional running shoes. Heavily padded running shoes like this have become more and more popular in the past few years with brands like Hoka also popping off.

But On Running differentiates itself with the Swiss angle and its branding centered around precision. 

Whether or not the shoes actually improves performance, the brand itself has been an absolute rocketship for the past few years.

On Running has exploded to be valued at over 8 Billion on the back of pure DTC efficiency. 

The main success here has been micro branding, focusing on hyper-specific deals and influencers to get the word out. The quality of the shoes apparently speaks for itself as a lot of ONON's growth has been organic. 

And that's all we need to know. It's tough being a European-based brand in this DTC market and ONON has exploded as they scale.

They only declined in their gross margins by just shy of 3%, and all of that can be chalked up to the foreign exchange markets being slightly out of favor with them. As the overall macro environment improves, ONON will become more and more valuable. 

This is wild considering their 68% year-over-year revenue growth that's maintained 13% EBITDA. In a very expensive environment, they have kept costs under control and maintained a ludicrously high LTV for all their customers. 

And frankly, that value-per-customer metric is only set to increase when you consider all of ONON's recent expansions:

Expanding Beyond Shoes:

On Running's shoes have been so well-received on the back of their advanced tech that it was a no-brainer for them to expand into all areas of running apparel, as well as all possible varieties of shoes. 

Their line of running apparel is up-scale branded and priced for a more premium customer, which has really helped On Running maintain its margins.

It may seem counterintuitive, but an inflationary spiral like the one we saw last year is actually a solid time to launch a premium-branded offering so that your higher prices are compared favorably to the rising costs of your established competitors. 

Every single new vertical ONON has launched has been successful -- driving revenue increases that pushed the brand to over 1 billion CHF in yearly revenue. 

We're still in the early innings of success here at ONON, there is still a lot of expansion and marketing the brand can do to drive revenue for their other shoe lines that come outside of running. 

On Running Outlook:

While DTC has been ONON's bread and butter -- their branding has allowed massive expansions on the wholesale side of things as well. In a lot of ways, ONON is the exact opposite of Nike, a newer DTC brand that is expanding its wholesale deals massively. 

There's still a little more risk for a company the size of ONON, but we're really excited to see where they push things from here. 

Much like Nike, their yearly revenue guidance is pricing in a slowdown of sales in the second half of the year.

We understand why consumer discretionary brands might opt for a more conservative approach given how volatile the economy has been -- but if inflation keeps trending in the right direction, our team is confident ONON can easily beat those numbers and rapidly push past our price target. 

ONON is on the right path, they just simply need to keep pushing further down it. 

Their Q2 earnings call is going to be critically important as we maintain our position moving forward. 

More importantly, this growth in China can just as quickly become a risk for Nike.

We need to see them keep that growth up if we're going to keep our confidence and if Nike's current run isn't them benefitting from a market desperate for a Santa rally. 

All the signs point to the positive, but we've got a long way to go here.

Rating: Overweight

Market Cap: $8.5B

Dividend Yield: N/A

Risk/Reward: Medium/Medium-High