Sonos Shares Drop After Morgan Stanley’s Double Downgrade
Sonos Shares Drop on Thursday after Morgan Stanley analysts downgraded the stock from Overweight to Underweight. The downgrade reflects concerns about the financial impact of Sonos’ recent app redesign.
Financial Impact of the App Redesign
In May 2024, Sonos launched a redesigned app to improve user experience. However, the redesign received heavy criticism from existing users, forcing Sonos’ CEO to apologize and delay upcoming product launches.
Morgan Stanley analysts lowered their fiscal year 2025 revenue and EBITDA projections by 5% and 13%, respectively. They also reduced the stock’s price target from $25 to $11.
Stock Valuation Concerns
Despite these issues, Sonos shares rose initially, driven by broader market trends. Analysts pointed out that the stock’s valuation now sits nearly one standard deviation above its historical average, which they consider excessive.
“We believe this divergence between valuation and fundamentals is unwarranted,” they said, citing declining net promoter scores and brand favorability. Analysts expect the negative impact on Sonos users to continue into FY25, which isn’t fully reflected in current market estimates.
Declining User Engagement and Growth
Sonos has historically relied on its ecosystem for growth, with repeat purchases and word-of-mouth referrals driving new customer acquisition. However, user engagement dropped to pre-COVID levels, and new user growth declined 9% year-over-year. Sonos’ recent product, Sonos Ace, also underperformed, further limiting market expansion.
Challenges Ahead for Sonos
Morgan Stanley expects Sonos to face tougher challenges in the near-to-medium term than the market anticipates. Ongoing struggles in the audio market, coupled with underperforming products, make it unlikely that Sonos will achieve consistent 10% revenue growth or 20% EBITDA growth in the near future.
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