Investing.com -- Morgan Stanley analysts issued a double downgrade on Sonos (NASDAQ:SONO) shares on Thursday, cutting the stock's rating to Underweight from Overweight.
The downward revision comes as analysts see a greater-than-anticipated negative impact of the company's recent app redesign on its financial performance. They highlighted that their forecasts for fiscal year 2025 revenue and adjusted EBITDA are 5% and 13% below the Street's consensus, respectively.
Alongside a downgrade, Morgan Stanley also reduced the price target on the stock to $11 from the previous $25.
Sonos shares fell more than 6% in premarket trading Thursday.
Sonos launched a completely overhauled app in early May 2024, aiming to provide a smoother and more innovative user experience. However, the redesign faced criticism from existing users, leading to a public apology from Sonos' CEO and a delay in product launches.
The company also lowered its revenue guidance for the September quarter by 40%. Despite these setbacks and downward revisions in revenue and adjusted EBITDA projections for fiscal years 2025 and 2026, Sonos shares have paradoxically risen with the broader market.
The stock is currently trading at a multiple that is nearly one standard deviation above its historical average, a valuation the analysts find unwarranted.
“We believe this divergence between valuation and fundamentals is unwarranted, and new data sets we've been tracking on net promoter scores, brand favorability, and purchase considerations show that the impact on Sonos users is likely to linger into FY25, something we don't believe Consensus estimates have fully accounted for,” analysts wrote.
“Given next-twelve-months (N12M) estimate revisions have the highest correlation to Sonos valuation, and our FY25 revenue and Adj. EBITDA estimates are now 5-13% below Consensus, we see a more challenging N12M setup for the stock,” they added.
Historically, a key strength for Sonos has been its ability to attract and retain customers within its ecosystem, leading to repeat purchases and new customer acquisition through word of mouth. However, the recent negative feedback from users, who account for approximately 44% of annual Sonos product registrations, presents a risk to this growth model, Morgan Stanley notes.
The firm believes that the negative sentiment could result in more substantial near-to-medium-term challenges for the company than the market currently expects.
These headwinds, coupled with the ongoing weakness in the audio market and the underperformance of its new product, Sonos Ace, contribute to the negative outlook.
Moreover, app engagement has dropped to pre-COVID levels, new user growth is down 9% year-over-year, and upcoming product launches are unlikely to expand the market. As a result, the analysts no longer expect Sonos to achieve consistent 10% revenue growth and 20% Adj. EBITDA growth in the near future.