Adidas could benefit from Nike’s innovation struggles, Morgan Stanley says

Sports footwear fashion trends are swinging to Adidas AG’s favor amid product innovation struggles by rival Nike Inc., according to Morgan Stanley analysts.

Evolving trends are seeing people trade their chunky basketball sneakers which have helped build the Nike brand for more casual, gum rubber-soled terrace style Adidas sneakers, analysts including Edouard Aubin and Grace Smalley said. 

The broker double upgraded its recommendation on the German stock to overweight from underweight and lifted its price target to €235 from €175. The stock jumped 4.4% to €205 as of 11:18 a.m. in Frankfurt. 

“Our recent round of channel checks showed a notable inflection on Adidas’ upcoming prospects in lifestyle, indicating very strong underlying and broadening sell-out trends,” Aubin and Smalley wrote in a note Monday. Adidas may “opportunistically benefit” from the innovation hiccups at Nike, while using a “more rational pricing approach” than it’s US competitor, they said.

A lack of freshness at Nike has been a complaint among Wall Street brokers, with one analyst last month remarking that the sneaker and apparel maker was “losing its luster.” Last week, the company held the Nike Air Innovation Summit in Paris, where they unveiled new products to reignite its fortunes. 

The broker said it was previously underweight amid skepticism around the benefit of the doubt given to Adidas by investors. The apparel maker has suffered a series of setbacks, including the demise of its Yeezy partnership with rapper Ye and loss of its sponsorship of the German national football team to Nike. 

Adidas now has 15 buy-equivalent recommendations, 14 holds and six sells among analysts tracked by Bloomberg. Aubin and Smalley’s new price target of €235 implies 20% upside from the stock’s close on Friday. So far this year, Adidas shares have risen 11%, while Nike has tumbled more than 15%.

“With CEO Bjorn Gulden now in the seat for nearly 18 months, our checks point to improved positive sentiment across both Adidas’ performance and lifestyle product, supported by improved marketing and wholesale service levels, as well as an increasingly favorable market backdrop,” the analysts wrote. “We see this building top-line momentum as powerful, and now more than offsetting risks to the story.”