The S&P 500 has surged by 9% year to date, making it increasingly challenging to discover undervalued assets. On Holding (NYSE: ONON), a relatively recent addition to the market, has experienced a 38% decline from its peak. Despite its upward trajectory this year, investors would be wise to examine this high-growth stock closely.
Why On looks like a compelling buy
You may have noticed individuals in your community donning On’s distinct CloudTec running shoes, which The Wall Street Journal humorously likened to a “mouth in dire need of braces,” or perhaps you’re already a loyal fan. Swiss-based On has cultivated a sizable and devoted following among affluent consumers who are willing to invest in its premium-priced, yet exceptionally comfortable footwear. Additionally, On has expanded its product line to include a comprehensive range of athletic wear, priced similarly to, or even slightly higher than, renowned sportswear giant Lululemon Athletica.
Several compelling factors converge to position On as an appealing investment opportunity. It occupies the intersection of limited brand awareness and rapid growth, with ample potential for sustained growth as it continues to penetrate new markets. Its upscale target demographic provides resilience even in challenging economic climates, while its premium pricing strategy and strong full-price sales contribute to robust profitability.
In 2023, On surpassed expectations, achieving a remarkable 47% year-over-year sales increase, or 55% on a currency-neutral basis. It successfully reached its mid-term goal of exceeding a 60% gross margin in the fourth quarter and anticipates maintaining this strong profitability throughout 2024.
Management forecasts a 30% currency-neutral sales growth for 2024. Although On has yet to consistently report profits under generally accepted accounting principles (GAAP), its net income surged by 38% for the full year of 2023
It has barely started in many markets
The company’s strategic approach encompasses four key pillars: bolstering brand recognition and community engagement, broadening market reach through a multi-channel framework, fostering innovation in product development, and optimizing scalability.
Brand awareness stands out as a significant component. It currently stands at 6% in France and a mere 4% in Australia, with similarly low rates in several affluent U.S. cities, such as 7% in New York and 12% in Dallas.
Despite its relative obscurity in certain regions, On has witnessed remarkable popularity in areas where it has gained traction. This has translated into impressive growth rates, such as a two-year compound annual growth rate (CAGR) of 103% in China (from the first half of 2021 to the first half of 2023) and a staggering 699% CAGR in the United Arab Emirates.
Management’s strategic initiatives include the opening of new stores in targeted locations, exemplified by the debut of its first store in Germany in March. Membership has surged ninefold since On’s initial public offering in 2021.
To enhance visibility, On leverages celebrity endorsements, counting defending New York City Marathon champion Helen Obiri, tennis stars Iga Swiatek and Ben Shelton among its sponsored athletes. Notably, tennis icon Roger Federer, an ardent supporter, has also become an early investor.
On boasts a robust pipeline of new products slated for release this year, including revamped designs for its top-selling running shoes. Its product range covers footwear for various sports, all characterized by its distinctive design ethos. Moreover, the company prioritizes technological advancements and automation to drive profitable scalability.
Is On stock a bargain?
The concept of a bargain extends beyond mere price or even price movement; it’s rooted in valuation. However, even valuation is relative, especially concerning high-growth stocks that typically warrant higher valuations compared to those with slower or declining growth trajectories.
On’s stock currently trades at a price-to-sales ratio of 6.4, a figure that may not be considered objectively cheap. Nevertheless, for a high-growth stock like On, this valuation could be deemed reasonable. While it may not fit the traditional definition of a bargain, it holds significant potential and could emerge as an exceptional growth stock in the coming years.
