On Wednesday, Goldman Sachs revised its stance on SMS Co Ltd. (2175:JP) (OTC: SMSZF), downgrading the stock from "Buy" to "Neutral" and reducing the price target from JPY3,000.00 to JPY2,000.00.
The adjustment follows the company's need to decrease advertising expenditures in the second half of the fiscal year ending March 2025 to meet its full-year profit goals, which may lead to slower revenue growth in the career segment in the coming years.
Goldman Sachs has also revised its operating profit estimates for SMS Co. for the fiscal years 2025 to 2027, with reductions of 3%, 10%, and 15%, respectively. Additionally, the firm has increased its weighted average cost of capital (WACC) assumption for its 10-year discounted cash flow (DCF) model from 7.0% to 8.5%, which contributed to the lower price target.
The new price target implies an upside of approximately 18%, which is now considered to be in line with the median of Goldman Sachs' coverage universe for small and mid-cap stocks, which has a median upside of 24%.
The downgrade comes after SMS Co.'s share price has experienced significant underperformance compared to the Tokyo Stock Price Index (TOPIX), with a decline of 36.9% since the stock was upgraded to "Buy" on November 22, 2023. Over the same period, the TOPIX has seen an 11% increase.
Goldman Sachs attributes the underperformance of SMS Co. shares to a substantial correction in valuations for small- and mid-cap growth stocks, driven by rising US interest rates. The firm also notes that despite aggressive hiring of career partners, SMS Co.'s revenue growth has not improved, which is believed to be a result of the deteriorating external environment.
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