Investing.com – RBC Capital Markets downgraded Swatch Group (SIX:) to an “underperform” rating in a statement on Thursday, citing structural and cyclical issues that could hinder the company’s performance in the coming years.
The brokerage also revised its target price for Swatch to CHF 140 from CHF 150, suggesting further downside risk from the stock’s current trading levels.
RBC analysts noted ongoing structural pressure on Swatch Group’s entry-level brands such as Swatch, Tissot and Certina, which together account for 80% of the company’s sales volumes but only 20% of its revenues.
These brands face increasing competition from smartwatches, whose adoption rates continue to increase. The global smartwatch market was valued at $44 billion in 2024—twice the size of the Swiss watch market—and is projected to grow at a compound annual growth rate of 14% through 2029.
Due to overlapping price points, smartwatches have been steadily cannibalizing Swatch Group’s lower-tier offerings, especially among younger consumers, who make up the majority of luxury demand but have the highest rates of smartwatch adoption.
RBC also pointed to the weaker performance of high-end Swatch brands such as Omega and Blancpain, noting their lower resale values compared to rivals such as Rolex and Cartier.
Omega, for example, is seeing an average 30-37% reduction in prices on the secondary market, making it less attractive to consumers looking to preserve value.
The dynamics of the resale market are exacerbated by oversupply: Omega’s listings on Chrono24, a major resale platform, outpace those of most peers, with the exception of Rolex.
Another factor against a downgrade is RBC’s view that consensus expectations for Swatch’s near-term earnings are too optimistic.
RBC’s earnings forecasts for 2024 and 2025 are 6% and 19% below market consensus, respectively. Analysts criticized the consensus forecast of 39% EBIT growth on just 3% revenue growth in 2025 as unrealistic.
Despite some stabilization in supplies, RBC expects cyclical issues such as excess inventories and weak sales of new products to continue into 2025. Pressure on profitability will be exacerbated by limited capacity utilization in the lower-priced brands segment.
In terms of valuation, RBC noted that Swatch trades at 20 times its 2025 earnings, a discount to the broader luxury goods sector.
However, this assessment is not viewed as compelling given the company’s ongoing structural headwinds and competitive pressures.
The company’s prospects are limited by both long-term challenges, including dependence on entry-level brands, and short-term headwinds, including loss of market share and weaker aftermarket performance.
RBC added that the future of the Swatch Group remains uncertain as it faces long-term challenges and short-term headwinds.
Rather, RBC favors other players in the luxury sector, such as Watches of Switzerland, which has an above-market rating.
Shares of the Swiss watch company fell more than 2% at 03:22 ET (0822 GMT).