Investing.com -- Shares of Garmin (NYSE:GRMN) were down 5% in pre-market trading on Monday after Morgan Stanley downgraded the stock to "underweight" from "equal-weight."
The downgrade reflects growing concerns over the company's future growth trajectory and profitability, as analysts forecast a significant deceleration in key business segments for 2025.
As a result, Morgan Stanley also lowered its price target for Garmin to $139 from $155, signaling potential downside from current levels.
The analysts point to several challenges that Garmin is expected to face in the upcoming year. Chief among them is a sharp slowdown in revenue growth, which has been one of the primary drivers behind the stock's strong performance in 2024.
Morgan Stanley predicts that Garmin’s topline growth could be halved in 2025, dropping to 7%—in line with its historical averages but a stark contrast to the 16% growth forecasted for 2024.
This deceleration is attributed to several headwinds, including tough year-over-year comparisons, the timing of new product launches, and market-specific challenges in sectors like fitness, outdoor, and marine.
As per Morgan Stanley, Garmin's fitness segment, which saw explosive growth this year due to strong product launches like the Venu 3 and Forerunner series, is expected to cool in 2025.
Analysts expect only modest growth in wearables, with product cycles maturing and no major new releases expected to match the 2024 launch cadence. Additionally, Garmin's outdoor segment may face similar difficulties, as the higher pricing of flagship products like the Fenix 8 could limit consumer demand.
The analysts also mention that the Fenix 8, priced at $1,000—a 50% increase over its predecessor—risks dampening refresh demand in a market increasingly sensitive to pricing.
The marine and automotive OEM segments also contribute to the cautious outlook. Garmin's marine business, which has been bolstered by the acquisition of JL Audio in 2023, is expected to face a challenging comparison in 2025.
Morgan Stanley forecasts just 3% growth for the segment next year, compared to 15% in 2024, as the broader boating market downturn persists and inorganic growth from acquisitions tapers off.
In the automotive OEM space, Garmin's partnership with BMW (ETR:BMWG) has been a key growth driver, but declining demand in the automotive sector and lower delivery volumes from BMW could weigh on performance.
The analysts flagged that current consensus estimates for this segment are overly optimistic and may be revised downward as headwinds materialize.
In addition to revenue concerns, Morgan Stanley flagged potential margin compression as another factor that could weigh on Garmin's stock.
Gross margins are expected to decline by around 100 basis points in 2025, reaching their lowest level in eight years. This margin pressure is driven largely by a shift in revenue mix, as lower-margin automotive OEM sales are projected to outpace higher-margin segments like aviation and outdoor.
The analysts also pointed to Garmin's history of continuing to invest heavily through economic cycles, suggesting that operating margins could also contract next year, exacerbating the overall financial outlook.
Morgan Stanley’s downgrade is rooted in the view that Garmin’s current valuation is unsustainable in light of the anticipated slowdown.
The stock, which has been trading near all-time highs, is valued approximately two standard deviations above its five-year historical average, and with growth decelerating, the brokerage expects a de-rating over the next 12 months.
Historically, Garmin's stock has experienced multiple contractions when growth slows, as seen in 2007 and 2021. The analysts believe that a similar pattern is likely to emerge, with Garmin trading at a price-to-earnings multiple well above its historical average, making the stock vulnerable to a correction as investors adjust expectations.
Morgan Stanley’s bearish outlook for Garmin contrasts sharply with its earlier stance, and the brokerage is now forecasting a risk-reward skew that is negatively biased.
While Garmin remains a high-quality company with a strong management team and a diversified revenue base, the report emphasized that the next 12 months present risks.