Under Armour trades at $6.69 per share and has stayed right on track with the overall market, gaining 5.9% over the last six months. At the same time, the S&P 500 has returned 7.9%.
Is now the time to buy Under Armour, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Under Armour Will Underperform?
We’re passing on Under Armour for now. Here are three reasons why there are better opportunities than UAA, plus one stock we’d rather own.
1. Declining Constant Currency Revenue, Demand Takes a Hit
Investors interested in Consumer Discretionary - Apparel and Accessories companies should track constant currency revenue in addition to reported revenue. This metric excludes currency movements, which are outside of Under Armour’s control and are not indicative of underlying demand.
Over the last two years, Under Armour’s constant currency revenue averaged 4.5% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Under Armour might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Over the last few years, Under Armour’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Under Armour burned through $162.2 million of cash over the last year, and its $1.94 billion of debt exceeds the $309.2 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Under Armour’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Under Armour until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Under Armour falls short of our quality standards. That said, the stock currently trades at 64.5× forward P/E (or $6.69 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at the most entrenched endpoint security platform on the market.
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