It's hard to think of a better situation for a potential Under Armour investor than the one that played out this morning. The company released its third-quarter results, beat the expectations of the market, and increased its annual earnings estimate. Yet, the stock sank in early trading. If that's not a buying opportunity, then I'm not sure what counts anymore.

Well, sure, if you're going to be "detail oriented," the company's massive price-to-earnings ratio might put you off. And yes, I suppose, Nike is still the much bigger dog in the fight. Also, the market expectation that the company beat might not really be the investor expectation that it needed to beat; but leaving those three things aside, Under Armour looks untouchable.


Under Armour's three things
In its last fiscal year, Nike did pretty well for itself. In fact, it earned over $25 billion in revenue. Estimates for the global sporting apparel market last year put it around $135 billion, meaning that Nike had a 19% share of the whole thing. One out of every five dollars spent on sporting apparel went to Nike. Under Armour's share of the global market was just $1.83 billion -- 1.4% of the total market.

The company's solution to this is massive growth. With revenue up 153% over the last five years, Under Armour is gaining ground, but it still has a long way to go. Nike's domination means that the company is in a position to pigeonhole Under Armour and, even today, Under Armour succeeds when it sells itself as the high-end, technologically forward version of sports.

Maybe that's not the end of the world -- David took on Goliath, after all. That's apt, as David had a lot riding on his shoulders, emotions were high, hopes were up, and failure would have been very bad. Under Armour is working with a similar set of expectations.

The company's trailing price-to-earnings ratio -- the cost to investors for $1 in income -- is over 60. Nike is trading at 26, and the industry average is just over 20. That means that the expectations for Under Armour's future are very high, indeed, and any misstep could send the stock down sharply.

While the newest earnings report from the company was strong, it turns out that it wasn't strong enough. With such high expectations, there's an additional need for high growth built into the company's stock price, going beyond the market's hopes. Under Armour failed to beat those expectations this time around, and even if it hits its goals, it might fail again.

The good news
Even with those hurdles, Under Armour may be in a position to succeed. While its plight is often seen in a David-Goliath light, that's not an entirely fair characterization. Under Armour can succeed without Nike failing. The niche that it inhabits is smaller, but much more profitable. Under Armour's gross margin was almost 10 percentage points higher than Nike's last year.

If you want to invest in growth, and a company that's managing its niche with mastery, Under Armour might be the company for you. If you want world domination, stick with Nike. Both companies look like long-term winners to me, though the ride for Under Armour might be a bit bumpier.

Back to that "world domination" thing...
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The article Under Armour's 3 Problems originally appeared on Fool.com.

Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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