Garmin Shares Decline in Pre-Market Trading Following Morgan Stanley Downgrade Citing Growth Concerns

Shares of Garmin saw a decline of 5% in pre-market trading on Monday following a downgrade by Morgan Stanley, which changed its rating from “equal-weight” to “underweight.”

This downgrade is indicative of growing concerns surrounding the company’s future growth and profitability, as analysts predict a notable slowdown in key business segments by 2025. Consequently, Morgan Stanley has also revised its price target for Garmin, lowering it from $155 to $139, which suggests a potential decline from current stock levels.

Several challenges are anticipated for Garmin in the coming year, with a primary concern being a significant slowdown in revenue growth. This growth has been a major factor in the stock’s robust performance thus far in 2024. Morgan Stanley estimates that Garmin’s topline growth rate could be cut in half in 2025, expected to fall to 7%, aligning with the company’s historical averages, compared to a forecasted 16% growth for 2024.

The expected deceleration is tied to a variety of headwinds, including difficult year-over-year comparisons, timing issues related to new product launches, and market-specific challenges in areas such as fitness, outdoor, and marine products.

Within the fitness segment, which enjoyed remarkable growth this year due to successful launches like the Venu 3 and Forerunner series, analysts foresee a cooling trend in 2025. Modest growth is anticipated in the wearables space, as product cycles mature and no major new releases are expected in line with the launch activity of 2024. Additionally, Garmin’s outdoor segment may encounter similar challenges, particularly with higher-priced flagship products, such as the Fenix 8, which may limit consumer interest.

Regarding the marine and automotive OEM segments, analysts remain cautious. Following Garmin’s acquisition of JL Audio in 2023, the marine business is expected to face challenging comparisons in 2025. Predictions suggest a mere 3% growth for this segment next year, down from 15% in 2024, as the broader boating market continues to struggle and growth from acquisitions slows.

In the automotive OEM space, while a partnership with BMW has been a key contributor to growth, cooling demand in the automotive sector and lower delivery volumes from BMW may negatively impact performance. Analysts have highlighted that the current optimistic consensus estimates for this segment may need to be adjusted downward as these challenges manifest.

In addition to revenue concerns, margin compression is another factor that could affect Garmin’s stock. Analysts forecast that gross margins may decline by approximately 100 basis points in 2025, reaching their lowest levels in eight years. This pressure is largely attributed to shifts in the revenue mix, as lower-margin automotive sales are expected to surpass those in higher-margin sectors such as aviation and outdoor.

Furthermore, the historical tendency for Garmin to invest heavily throughout economic cycles suggests that operating margins could also be under pressure next year, further complicating the financial outlook.

Morgan Stanley’s downgrade stems from the belief that Garmin’s current valuation cannot be maintained in light of the expected slowdown. The stock has been trading close to all-time highs and is valued significantly above its five-year historical average. Given the anticipated deceleration in growth, the brokerage foresees a de-rating of the stock over the next year.

Historically, Garmin’s stock has experienced similar contractions during periods of growth slowdown, as seen in 2007 and 2021. Analysts expect that a similar trend may unfold, with the stock trading at a price-to-earnings multiple considerably higher than its historical average, rendering it susceptible to a market correction as investor expectations adjust.

Morgan Stanley’s more negative outlook for Garmin represents a shift from its previous stance, now forecasting a risk-reward profile that leans towards the downside. Despite Garmin being recognized as a high-quality company with a capable management team and a diversified revenue stream, the report underscores that the upcoming year may pose various risks for the firm.