Equity Recommendation - On Holding AG (ONON US)

1. The case in brief

On has done something almost no one else in athletic footwear has managed: it has scaled past CHF 3 billion of revenue while raising price realisation rather than defending it with discount. Gross margin has expanded nine percentage points in four years, to 65.4% in the second quarter of 2026, and it has done so while holding inventory flat against a 30% revenue increase. That combination of growth without markdown, scale without dilution of the brand is the entire investment case, and it is not currently in the share price.

The stock has de-rated 42% from its 52-week high on concerns about a slowing Americas region and disciplined wholesale sell-in. Both are real and both are addressed below. Neither, in our view, alters the structural economics. At USD 29.64 the enterprise trades on roughly 10x this year's expected adjusted EBITDA and 5.7x the adjusted EBITDA implied by management's own 2029 target, a target reiterated and extended at the Investor Day on 22 September, alongside the company's first-ever share repurchase authorisation.

The core observation

A brand that does not discount, in a category defined by discounting, is being valued as though it will have to start.

2. Brand: the premium position is the asset

On occupies a position in sportswear that is genuinely difficult to replicate. It was built from a technical proposition - CloudTec cushioning, later LightSpray manufacturing validated on elite competitive stages, and only then extended into lifestyle and fashion adjacency. That order matters. Brands that begin in lifestyle and attempt to reverse into performance credibility rarely succeed; On did it the direction that works.

Management's own framing at the Investor Day was that the company prioritises earned brand equity over promotional spending, and targets what it calls the "Movement Class" consumers for whom sportswear is identity rather than utility. Strip away the language and the operating consequence is measurable: On converts brand desire into full-price sell-through instead of into marketing expense, which is why the gross margin line looks the way it does.

The clearest evidence that the brand is travelling beyond its founding category is what is happening outside running shoes. In the first half of 2026 apparel grew 46.4% and accessories 80.3%, against 11.5% for shoes. These are small bases, but they are the categories where brand permission, not product engineering determines whether a customer buys. The Mbappé partnership and the announced entry into football and golf extend the same logic into two categories currently controlled by two incumbents.

Geographically the brand is generalising as well. Asia-Pacific grew 43.7% in the first half and now accounts for 20.5% of sales, from a standing start five years ago. EMEA grew 18.8%. The proposition is not culturally specific to one market.

3. Full-price leadership: the evidence

This is the part of the thesis that should be assessed on numbers rather than narrative, and the numbers are unambiguous.

Source: On Holding AG Form 20-F FY2022–FY2025; Form 6-K for the period ended 30 June 2026. Gross margin calculated as gross profit divided by net sales.

Three things stand out.

Nine points of gross margin in four years. Margin expansion of this size and consistency in a hardgoods consumer business is not a mix accident. It reflects a growing direct-to-consumer share, a rising apparel and accessories contribution, and most importantly the absence of a markdown channel eroding realised price.

Inventory held flat through a 30% revenue year. In FY2025 On grew net sales 30.0% while year-end inventory rose 0.1%, from CHF 419.2m to CHF 419.8m. Implied inventory turns improved from roughly 2.2x to 2.7x. This is the single hardest number in the release to argue with: a brand that is discounting to move product does not exit a 30% growth year with flat inventory. It is also the mechanism by which the brand protects itself. Excess inventory is what forces promotion, and On is not accumulating any.

Direct-to-consumer is compounding faster than wholesale, by design. DTC reached 42.2% of first-half 2026 sales, growing 21.4% against 9.1% for wholesale. Management explicitly attributed the wholesale rate to disciplined sell-in - that is, deliberately shipping less into the channel to protect full-price integrity at retail. Most brands would take the revenue. On declined it. That is what full-price leadership costs, and it is why the margin line holds.

Management commitment, Investor Day, 22 September 2026

An industry-leading gross profit margin of at least 65.0% sustained throughout the 2026–2029 period, alongside an adjusted EBITDA margin ambition of 22%+ by 2029.

4. The runway, management has now committed to

At the Investor Day on 22 September 2026 the company set out targets for the 2026–2029 period: high-teens constant-currency net sales growth, net sales of at least CHF 5.6 billion by 2029, gross margin sustained above 65.0%, and an adjusted EBITDA margin of 22%+ by 2029, producing an adjusted EBITDA CAGR above 20%. The Board authorised a repurchase of up to USD 1 billion of Class A shares through the end of 2029, the company's first.

Two details are worth weighting. First, management stated it is on track to significantly exceed the 2026 targets it set at the 2023 Investor Day, which is a credibility marker on the new set. Second, the buyback authorisation is a signal about the cash profile: On carries no drawn borrowings and CHF 1,205.6m of cash as at 30 June 2026, and is now confident enough in conversion to commit capital to repurchase rather than hold it.

Full-year 2026 guidance was reiterated: constant-currency net sales growth in the low-20% range, gross margin of at least 65.0%, and an adjusted EBITDA margin of 19.5% to 20.0%, excluding up to USD 65 million of tariff refunds expected in the third quarter.

5. Valuation

The de-rating is the opportunity. The shares have fallen from a 52-week high of USD 51.08 to USD 29.64. On the closing share count of 336.1m Class A-equivalent shares, that is a market capitalisation of approximately CHF 8,186m; net of CHF 1,200m of net cash (around 15% of the market capitalisation), enterprise value is approximately CHF 6,986m.

Enterprise value derived from 336.1m diluted Class A-equivalent shares (301.7m Class A plus 325.0m Class B at the 10:1 conversion ratio, plus dilutive awards) at USD 29.64, translated at CHF/USD 1.2170, less CHF 1,200m net cash. FY2026E and 2029E adjusted EBITDA derived from company guidance.

A business compounding revenue in the high teens with a 65% gross margin and a stated path to a 22% EBITDA margin is being asked to clear a very low bar at 5.7x its own 2029 target. The multiple carries an implicit assumption that either the growth or the margin does not arrive.

Discounted cash flow

The valuation is built on unlevered free cash flow to the firm over a ten-year explicit forecast, with a Gordon Growth terminal value, discounted at a 9.0% WACC. Terminal growth is 3.0%. Assumptions are as follows.

Base year FY2026E net sales of CHF 3,451.1m, being H1 2026 actual of CHF 1,682.2m plus H2 2026 estimated at 15% reported growth on H2 2025 actual of CHF 1,538.2m. Depreciation and amortisation is embedded within the EBIT margin assumption and therefore not added back separately; capex is deducted gross. Lease liabilities are correspondingly excluded from the net cash bridge to avoid double-counting.

Sensitivity

Value per share in USD, across WACC and terminal growth.

Base case highlighted. The grid does not close the gap to the current price at any combination tested: at an 11.0% WACC and 2.0% terminal growth the model still returns USD 49.05, 65% above the market.

6. Risks to the thesis

Americas growth has stalled

The Americas grew 3.7% in the first half of 2026 and represent 53.6% of group sales. This is the most substantive bear argument and the proximate cause of the de-rating. Management attributes part of it to deliberate wholesale sell-in discipline; if it instead reflects brand saturation in the region, the growth assumptions above do not hold.

Concentration in a single product category

Shoes were 91.9% of first-half 2026 sales. The apparel and football/golf extensions are early and unproven at scale, and are being attempted against entrenched incumbents.

The no-discount stance is being tested

A premium, full-price position is an asset in a strong consumer environment and a liability in a promotional one. The thesis depends on that discipline holding; the moment On discounts to defend volume, the gross margin argument inverts.

Currency translation

Reporting in CHF against predominantly USD and EUR revenue has produced material translation drag — first-half 2026 reported growth of 14.0% sat well below the constant-currency rate, and a foreign exchange loss of CHF 154.4m ran through the first half of 2025.

Terminal value weighting and assumption sensitivity

66% of enterprise value in the base case sits in the terminal value. Separately, the year-one EBIT margin of 21.0% assumed here is materially above the 13.8% reported on a last-twelve-months basis to June 2026 and above the FY2026 adjusted EBITDA margin guidance of 19.5–20.0%; the valuation is highly geared to that margin path being achieved on the timeline modelled.

Tariffs and governance

Trade policy remains an active cost variable, partially offset by the USD 65m refund expected in the third quarter. Class B voting-rights shares concentrate control with founders and early holders.

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Basis of preparation and sources

1. On Holding AG, Annual Report on Form 20-F for the year ended 31 December 2025, filed with the SEC on 3 March 2026.

2. On Holding AG, Report on Form 6-K for the period ended 30 June 2026, filed 11 August 2026 — unaudited interim condensed consolidated financial statements and notes.

3. On Holding AG, Report on Form 6-K filed 22 September 2026, Exhibit 99.1: "On Enters Next Chapter: Unveils Strategy to Redefine What a Sportswear Brand Can Be Alongside 2029 Financial Targets."

4. Annual Reports on Form 20-F for the years ended 31 December 2022, 2023 and 2024 for historical gross margin and inventory series.

5. Share price and CHF/USD rate are market data as at 22–23 September 2026, used for translation and reference only.

All financial data is drawn from the company's SEC filings. Forward-looking targets are management's own, as disclosed in the Investor Day release, and are not independently verified. Adjusted EBITDA is a non-IFRS measure as defined by the company; On does not provide a reconciliation of forward-looking adjusted EBITDA to IFRS net income.

The valuation reflects analyst-supplied assumptions and is materially sensitive to the EBIT margin, revenue growth and discount rate inputs set out in section 5. It is one methodology applied under one set of assumptions and should be read alongside the risks in section 6.