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Investing.com -- Shares of Swatch Group (SIX:UHR) traded lower on Tuesday after Morgan Stanley (NYSE:MS) downgraded the stock to "underweight."
The brokerage cited multiple structural challenges as reasons for the downgrade, accompanied by a reduction in their price target for Swatch Group to CHF 145 from CHF 175 —a 13% downside projection.
Morgan Stanley identified several key challenges facing Swatch Group. The company has been losing market share in a shrinking watch market, particularly in the low-end segment. This segment faces increasing competition from smartwatches and other technological alternatives.
Furthermore, Swatch’s reliance on high-cost production in Switzerland and the persistent strength of the Swiss franc have created additional headwinds for profitability.
Sales estimates for the second half of 2024 have been revised downward, with Morgan Stanley now forecasting a 12% decline, compared to a previous 7% estimate.
The analysts also projected Swatch’s operating profit for the same period to be CHF 211 million—far below the CHF 293 million consensus.
This reflects ongoing concerns over operational inefficiencies and the impact of declining demand, especially in key markets such as China.
Adding to these challenges, the report highlighted issues related to inventory management, noting that Swatch’s inventory has ballooned to 105% of its last twelve months' sales—a record high.
This accumulation could lead to further depreciation in inventory value as older models lose appeal, particularly in the competitive secondary watch market where prices have steadily declined over the past 11 quarters.
Morgan Stanley said that the hype surrounding the MoonSwatch collaboration, a recent success for the Swatch brand, has peaked. Sales for the MoonSwatch are projected to fall from 2 million units in 2023 to 1.5 million in 2024, a drop that could translate to an estimated CHF 125 million decline in revenue for the brand.
Despite trading below book value, Morgan Stanley views Swatch Group’s valuation as justified given its lack of a clear catalyst for near-term recovery.
The brokerage’s concerns extend to the long-term trajectory, with expectations of continued market share erosion, especially in China, where Swatch’s key brands face intensifying competition.