RBC downgrades Swatch to ‘underperform’, citing structural and cyclical challenges By Investing.com
Investing.com — RBC Capital Markets downgraded Swatch Group (SIX:) to an “underperform” rating in a note on Thursday, citing structural and cyclical challenges that could hamper the company’s performance in the coming years.
The brokerage also revised its price target for Swatch to CHF 140 from CHF 150, indicating further downside risk from the stock’s current trading levels.
RBC analysts flagged ongoing structural pressures on Swatch Group’s entry-level brands, such as Swatch, Tissot and Certina, which together account for 80% of the company’s volume but only 20% of its revenue.
These brands face increasing competition from smartwatches, whose adoption rates continue to rise. In 2024, the global smartwatch market is estimated to be worth $44 billion – twice the size of the Swiss watch market – and is forecast to grow at a CAGR of 14% through 2029.
With overlapping price points, smartwatches are steadily cannibalizing Swatch Group’s lower-end offerings, particularly among younger consumers who make up the majority of luxury demand, yet show the highest adoption rates of smartwatches.
RBC also pointed to the underperformance of Swatch’s top brands such as Omega and Blancpain, noting a decline in their resale values compared to rivals such as Rolex and Cartier.
Omega, for example, sees an average price drop of 30-37% on the secondary market, making it less attractive to consumers looking to retain value.
The dynamics of the resale market are further complicated by oversupply, with Omega listings on Chrono24, the main resale platform, outnumbering those of most competitors except Rolex.
Another factor influencing the downgrade is RBC’s view that consensus expectations for Swatch’s near-term earnings are overly optimistic.
RBC’s 2024 and 2025 earnings estimates are 6% and 19% below market consensus, respectively. Analysts criticized the consensus forecast for EBIT growth of 39% with revenue growth of just 3% in 2025 as unrealistic.
Despite some supply stabilization, RBC expects cyclical issues such as excess inventory and weak new sales to persist through 2025. Pressure on margins will be exacerbated by limited industrial capacity utilization in lower-priced brands.
In terms of valuation, RBC noted that Swatch trades at 20 times its 2025 earnings, a discount compared to the broader luxury sector.
However, this assessment is not considered convincing given the company’s ongoing structural disruptions and competitive pressures.
Its outlook is limited by both long-term challenges, including reliance on entry-level brands, and short-term headwinds, including losses in market share and underperformance in the secondary market.
RBC added that the future remains uncertain for Swatch Group as it faces long-term challenges and short-term headwinds.
Instead, RBC favors other hard luxury players, such as Watches of Switzerland, which has a better rating.
Shares of the Swiss watchmaker were down over 2% at 03:22 ET (08:22 GMT).
