Sonos Shares Drop After Morgan Stanley’s Double Downgrade and Price Target Cut

Morgan Stanley analysts have issued a significant downgrade for Sonos shares, adjusting their rating from Overweight to Underweight. This move reflects concerns about the anticipated negative effects of the company’s recent app redesign on its financial outcomes. The analysts reported that their projections for fiscal year 2025 revenue and adjusted EBITDA are now 5% and 13% lower than the consensus estimates.

In addition to the downgrade, Morgan Stanley has lowered the price target for Sonos stock from $25 to $11. Following this news, Sonos shares experienced a decline of more than 6% in premarket trading.

The company recently launched a completely redesigned app in May 2024, aimed at enhancing the user experience. However, it faced backlash from current users, prompting a public apology from the CEO and delaying product launches. Additionally, Sonos reduced its revenue guidance for the upcoming September quarter by 40%. Despite these setbacks, the company’s stock has surprisingly risen alongside the broader market.

Currently, Sonos shares are valued at a multiple that is significantly above its historical average, a valuation that analysts consider unjustified. They expressed concerns regarding a discrepancy between the stock’s valuation and its underlying fundamentals. Data on customer sentiment such as net promoter scores and brand favorability indicate that the negative impact on Sonos users may persist into fiscal year 2025, something that consensus estimates do not fully reflect.

Analysts also noted that with revisions to next-twelve-month estimates being closely linked to Sonos’s valuation, their fiscal year 2025 estimates for revenue and adjusted EBITDA being lower than consensus indicates a more difficult near-term outlook for the stock.

Sonos has historically thrived by building a loyal customer base within its ecosystem, leading to repeat purchases and growth through word-of-mouth referrals. However, recent negative feedback from users, who represent about 44% of annual product registrations, threatens this growth trajectory. Morgan Stanley believes that the current adverse sentiment could pose more significant challenges in the near to medium term than the market is anticipating.

These challenges, coupled with ongoing weaknesses in the audio market and underperformance of the new Sonos Ace product, contribute to a cautious outlook for the company. Furthermore, app engagement has reverted to pre-COVID levels, new user acquisition has decreased by 9% year-over-year, and anticipated product launches are not expected to significantly expand the market. Consequently, analysts have revised their expectations for Sonos, no longer anticipating consistent revenue growth of 10% or adjusted EBITDA growth of 20% in the near future.