Can Nike Replace Maria Sharapova?

Nike Inc. (NYSE: NKE) has a long history sponsoring players and making an extremely powerful brand for itself. However the Swoosh could be losing one of the world’s most popular and followed tennis players due to a drug test violation. The company suspended its ties with Russian tennis star Maria Sharapova after she announced a failed drug test at the Australian Open.

This is not the first time that Nike has taken precautionary moves like this. Other athletes have seen similar pitfalls and recoveries.

The deal that Nike has suspended is perhaps the most lucrative that Sharapova has going for her, valued up to $12.5 million annually. With an eight-year life to the contract, its total value is estimated to be about $100 million.

According to Forbes, Sharapova was the highest-paid female athlete between June 2014 and June 2015, earning nearly $30 million in just that one-year span. An even more staggering feat is that Sharapova has held this title of the highest-paid female athlete for the past 11 years.

It is no doubt that her name is synonymous with brand strength and Nike is willfully suspending a powerful ally. So how will Nike handle this situation?
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The current approach to only suspend the business relationship for now is prudent, while there are still more details coming to light in a separate investigation. The drug that Sharapova was in trouble for, meldonium, was only a recently banned by the World Anti-Doping Agency (WADA) on January 1, 2016. This drug is used in the treatment of diabetes and low magnesium levels (not exactly a performance enhancer), and at a cursory glance it does not seem like a major infraction.

The case might be that Nike retains Sharapova if this is treated lightly, but currently we are in the age of outrage, where one slip up by a company or athlete results in zero tolerance. Nike shouldn’t worry too much about the outcome because it has a large portfolio of other sponsored athletes on the tennis court.

Although Nike is losing Sharapova — for now at least from the suspension — the company has nearly 20 other professional tennis athletes that it sponsors, including the likes of Rafael Nadal, Serena Williams and Roger Federer. One of the other highest grossing female athletes in the world is Serena Williams, coming in at $24.6 million from prize money and endorsements between June 2014 and June 2015.

So far in 2016, Nike has underperformed the broad markets, with the stock down nearly 5%. However, over the past 52 weeks the stock is up over 23%.

Shares of Nike were trading up 1.6% at $60.19 on Tuesday, with a consensus analyst price target of $71.92 and a 52-week trading range of $47.25 to $68.19.