Premium Positioning And Aggressive Expansion Will Eventually Expose Material Margin And Execution Risks

Catalysts

About On Holding

On Holding designs, manufactures, and sells premium performance and lifestyle sportswear, with a core focus on innovative running footwear and an expanding apparel portfolio.

What are the underlying business or industry changes driving this perspective?

• Hyper-aggressive growth expectations anchored in sustained above 30% constant currency CAGRs rely on a flawless rollout of new technologies like LightSpray and continuous franchise refreshes. This leaves little room for missteps in product adoption or innovation cycles and risks material downside to revenue growth if any key launch underperforms.
• Dependence on premium positioning and full price discipline exposes the model to a potential normalization in consumer appetite for high priced performance and lifestyle sportswear. Even a modest shift toward value or increased promotional intensity from competitors could compress pricing power and erode gross margins.
• Rapid international expansion, particularly in Asia Pacific where net sales are growing above 100% at constant currency and approaching one fifth of total sales, increases operational complexity and execution risk in supply chain, retail operations, and inventory planning. This heightens the probability of localized oversupply and markdowns that would pressure both revenue growth and earnings.
• Ambitious plans to scale apparel as a stand alone growth pillar with a more DTC heavy, retail led approach require substantial upfront investments in stores, merchandising, and marketing. If category adoption slows or repeat behavior disappoints, fixed cost leverage could reverse and weigh on net margins and operating profit.
• Elevated expectations around structural margin gains from premium mix, DTC penetration, and improved distribution costs are being set at a time when tariffs, foreign exchange volatility, and freight could turn less favorable. Any reversal in these external tailwinds would likely drive a disproportionate hit to future gross margin and adjusted EBITDA.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on On Holding compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming On Holding's revenue will grow by 14.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 12.3% today to 10.8% in 3 years time.
• The bearish analysts expect earnings to reach CHF 526.5 million (and earnings per share of CHF 1.7) by about August 2029, up from CHF 396.2 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as CHF749.0 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.8x on those 2029 earnings, down from 20.2x today. This future PE is lower than the current PE for the US Luxury industry at 17.4x.
• The bearish analysts expect the number of shares outstanding to grow by 1.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.54%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is delivering structurally higher gross profit margins, now at 65.7% with an adjusted EBITDA margin of 22.6%. These margins are already above its long term targets and are supported by durable drivers such as premium pricing power, increasing direct to consumer mix and distribution efficiencies. This raises the risk that earnings and net margins remain elevated rather than contract.
• Management has repeatedly raised its medium term outlook, now targeting at least a 30% constant currency revenue CAGR from 2023 to 2026 and lifting guidance for both 2025 sales and gross margin. This suggests that underlying demand, brand momentum and order books across regions could sustain strong top line growth instead of the anticipated slowdown in revenue.
• Asia Pacific is rapidly becoming a major growth engine, with triple digit constant currency increases in Greater China, South Korea and Southeast Asia and approaching 20% of total net sales. This diversifies geographic exposure and creates a long runway for incremental revenue and profit contribution rather than regional saturation.
• The apparel business, currently only about 8% of total sales with more than 1 million units sold in a quarter and growing over 100% at constant currency, is being built as a higher margin, direct to consumer heavy pillar. This could meaningfully expand category mix, increase purchase frequency and lift both revenue and net margins over the long term.
• On is successfully embedding itself in cultural and performance touchpoints, from elite athlete victories and major marathons to collaborations with figures like Zendaya, Roger Federer and Burna Boy. This strengthens brand equity with younger global consumers and could support sustained pricing power, premium sell through and resilient earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for On Holding is $24.9, which represents up to two standard deviations below the consensus price target of $44.87. This valuation is based on what can be assumed as the expectations of On Holding's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $73.07, and the most bearish reporting a price target of just $19.93.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be CHF4.9 billion, earnings will come to CHF526.5 million, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 8.5%.
• Given the current share price of $29.9, the analyst price target of $24.9 is 20.1% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.