On Holding (NYSE:ONON) is a stock I’m quite excited about in my SIPP and ISA portfolios. Well, I would have to be to have it in both of them!
Yet, despite my enthusiasm, this growth stock hasn’t done much growing since I first invested last year. In fact, it’s now down 7% in total after falling 25% year to date.
But if Wall Street forecasts are anything to go by, my patience could be rewarded handsomely by this time next year. That’s because the average 12-month target is just under $53 — roughly 51% above the current level.
Why might On stock be undervalued at $34?
Initially sceptical
Confession: when I first started looking at the Swiss running shoe company last summer, I wasn’t entirely convinced.
That’s because there have been a handful of new kids on the block in the global premium athleisure market over the last decade or so. And after being popular for a few years, these brands have faded, resulting in very poor stock market returns.
Here are three that spring to mind (five-year performance):
- Under Armour: −71%
- Lululemon Athletica: −69%
- Smartbird (formerly Allbirds): −99%
Differentiating factors
So, what makes On potentially different? Well, Lululemon and Allbirds started with a single lifestyle angle (premium yoga pants and environmentally friendly footwear, respectively). But when fashion tastes shifted, they struggled to pivot.
Fist and foremost though, On has established itself as a hardcore performance running brand, building credibility with professional marathoners. And runners tend to be loyal to quality gear that protects their feet and joints.
As for Under Armour, it started selling products at a discount to boost quarterly sales targets, which damged its premium brand image. But On manages its wholesale partnerships like a luxury brand by limiting which retailers can stock the shoes.
It very rarely does discounts, which has led to an industry-leading gross margin (64.2% in Q1, despite tariff pressures).
Third, founder-led On stands out from the crowd in terms of innovation, as evidenced by the following two patented technologies:
- CloudTec: the cloud styles on the trainer soles are a patented cushioning system to reduce muscle fatigue and boost performance.
- LightSpray: a robotic upper-manufacturing arm sprays a single continuous filament onto a sole inside three minutes, eliminating seams and waste.
The advanced engineering and serious attention to detail makes me believe this is not a flash-in-the-pan brand.
Finally, there’s China, where Western brands like Nike are struggling badly due to the popularity of domestic rivals. Yet in Q1, China helped On’s Asia Pacific sales rocket 61.4% on a constant currency basis, making up more than 20% of total global sales.
What about valaution?
As mentioned though, the company charges full whack for its premium products. So any further deterioration in consumer spending power, including potential AI-related job losses, is a risk to growth moving forward. Tariffs also add uncertainty.
For me, though, the company’s guidance for at least 23% full-year sales growth even in a challenging environment is impressive. And its apparel business is only just getting started, with a multi-year growth runway ahead.
Finally, the icing on the cake is that the shares can currently be picked up for a very reasonable 21 times forward earnings.
At this price, I think the stock is worth considering as part of a diversified SIPP/ISA.
Should you invest £5,000 in On Holding right now?
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Ben McPoland owns shares in On Holding.
