Morgan Stanley Downgrades Sonos, Cuts Apple PT on Slowing Consumer Spending

This post was originally published on this site

Morgan Stanley analyst Erik Woodring made a series of moves in the bank’s research coverage of the IT Hardware sector, leaving Apple (NASDAQ:AAPL) as the only Overweight-rated stock.

Woodring cut Sonos (NASDAQ:SONO) stock rating to Equal Weight from Overweight with a price target of $28.00 per share (down from $38.00). SONO shares slipped over 3% in pre-market Wednesday on the news.

“While we are longer-term bulls given Sonos’ strong product portfolio and differentiated growth flywheel, we believe the odds of demand slowdown on the back of moderating consumer spending are rising and therefore see a less clear path to positive estimate revisions and/or a multiple re-rating, making it harder for the stock to outperform peers,” Woodring told clients in a note.

The downgrade move comes in the light of the consumer spending slowdown.

“While low and mid-range consumer spending data points have been deteriorating for months, high-end consumer spending has held up. This is important, given the top 20% of earners in the US account for 40% of overall consumer spending and nearly 30% of GDP. However, with the stock market down 22% YTD, consumer confidence at a 10-year low, and inflation at 40-year highs, the risks of a pullback at even the high-end consumer are rising,” Woodring added.

Morgan Stanley’s latest survey shows that the majority of respondents are calling for slower spending trends in the next six months amid red-hot inflation. For Woodring, “this is no longer a risk that investors can ignore.”

The slowdown will mostly affect “COVID beneficiaries” in the near term with Logitech (NASDAQ:LOGI) and Cricut (NASDAQ:CRCT) in the worst position.

“We do not think any company in our coverage is immune to a slowdown in consumer spending, and therefore cut FY23 estimates across the board, with FY23 revenue cut by 5%, on average, and FY23 profitability (EPS or EBITDA) down 7% vs. our prior estimates,” the analyst explained.

Along these lines, Woodring also cut the Apple price target to $185.00 per share (from $195.00).

“While we remain positive on Apple’s ability to outperform peers both near-term and longer-term, tactically, we believe consensus estimates still need to come down to reflect weaker consumer spending.”