On Monday, Morgan Stanley downgraded shares of Zalando SE (ZAL:GR) (OTC: ZLNDY) from Overweight to Equal-weight and lowered the price target to €24.00 from €28.00. The downgrade reflects the firm's view on the challenging conditions within the European online apparel market, characterized by intense competition and a weak macroeconomic environment.
The analyst from Morgan Stanley highlighted that despite Zalando's strategic initiatives to increase its customer appeal through expanded categories, logistics services, and an evolving platform ecosystem, growth expectations remain muted. The firm's revenue compound annual growth rate (CAGR) projection for Zalando stands at approximately 5-10% for the years 2023-2028, which is at the lower end of the company's medium-term guidance.
According to Morgan Stanley, Zalando's significant active customer base of around 50 million could face difficulties in achieving substantial growth. The analysis diverges from the consensus estimates, which anticipate an increase to 54 million active users by 2026 and 59 million by 2028, as per data from Visible Alpha. Morgan Stanley's assessment suggests that maintaining a broadly flat active customer base through to 2028 is a more realistic expectation.
The firm's assessment is based on the premise that the online apparel sector in Europe offers limited growth and margin opportunities due to the factors mentioned. Zalando's efforts to adapt and expand are acknowledged, but the firm remains cautious about the potential for significant customer base expansion in the coming years.
In other recent news, Zalando SE has been the subject of an upgrade by Citi, which has shifted its stance from Neutral to Buy for the European e-commerce fashion giant. This upgrade is accompanied by an increased price target of €32.00, a significant leap from the previous target of €20.50. The basis for this upgrade is an anticipated return to positive Gross Merchandise Value (GMV) growth in the first quarter of 2024, a trend not observed since the first quarter of 2023.
Citi's analysis indicates that this growth could potentially trigger a revaluation of Zalando's shares. The firm's projections are notably more bullish than the consensus, forecasting a 6% higher adjusted EBIT for 2024 and a substantial 12% higher forecast for 2028. The analysts at Citi suggest the potential for additional fulfillment cost efficiencies at Zalando, which they believe has been underestimated by the market.
InvestingPro Insights
As Zalando SE (ZLNDY) navigates the competitive landscape of the European online apparel market, real-time data and insights from InvestingPro offer investors additional context for Morgan Stanley's recent downgrade. Zalando's market capitalization currently stands at $6.19 billion, reflecting its position within the industry. Despite recent challenges, Zalando holds more cash than debt on its balance sheet, a sign of financial stability that may reassure investors. Additionally, the company's net income is expected to grow this year, indicating potential for recovery and growth amidst market headwinds.
InvestingPro data also shows Zalando trading at a P/E ratio of 53.95, which adjusts to a more favorable 43.3 when considering the last twelve months as of Q1 2024. This is complemented by a PEG ratio of 0.28 during the same period, suggesting that the stock may be trading at a low price relative to near-term earnings growth. Moreover, with a price/book ratio of 2.39, Zalando's stock appears to be valued reasonably in relation to its assets. It's important to note that while the company does not pay a dividend, analysts predict profitability for the year, and the firm has been profitable over the last twelve months.
For investors seeking more comprehensive analysis, InvestingPro offers additional InvestingPro Tips for Zalando, which can be accessed through a subscription. By using the coupon code PRONEWS24, investors can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. With several more tips available on InvestingPro, including insights on Zalando's stock price volatility and liquidity, investors can gain a deeper understanding of the company's financial health and market position.
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