Morgan Stanley: The Street Is Overestimating Weight Watchers' Addressable Market

Weight Watchers International, Inc. WTW's turnaround story remains compelling, but the company's growth trajectory precludes a bullish stance, according to Morgan Stanley. 

The Analyst

Morgan Stanley's Vincent Sinisi initiated coverage of Weight Watchers International with an Equal-weight rating and $76 price target.

The Thesis

One of the biggest disconnects between the Street's expectations for Weight Watchers and reality is the total addressable market, Sinisi said in the initiation note. (See his track record here.) 

The market is assuming the the $66-billion U.S. commercial weight loss market is fully applicable to Weight Watchers, the analyst said. A more realistic view of Weight Watchers' addressable market is around $18 billion and based on an addressable market of 31 million people in the U.S. and 50 million globally, he said. 

While the Street is assuming the company has a "long expansion runway ahead," investors should be cautious on the opportunity until Weight Watchers demonstrates an ability to significantly expand into new demographic groups, Sinisi said.

The company could rebrand itself from a dieting and weight loss platform to an all-inclusive, health and wellness lifestyle platform, which would give it better exposure to the $3.7-trillion global health and wellness market, according to Morgan Stanley. Yet a radical shift to better target the larger market will take "considerable time" and may not even be feasible given its decades-long image as a weight loss company, Sinisi said. 

Weight Watchers' digital focus is flashing some concerning signs, including "very low" user engagement of 2 minutes per user per day on its app, the analyst said. The app is in direct competition with social media giants with an established organic Weight Watchers group that includes hundreds of thousands of people, he said. 

Morgan Stanley's $76 price target implies minimal upside from current levels and is based on a 19 times multiple on 2019 estimated EPS, which is already a slight premium to its three-year average.

A more constructive stance on the stock would be appropriate if the company improves retention at a faster-than-expected rate and shows material expansion in smaller demographic groups like younger males.

Price Action

Weight Watchers shares were trading down 1.1 percent at $72.07 at the time of publication Thursday. 

Related Links:

Weight Watchers Is Unlikely To Hit Its Revenue Goal, Goldman Sachs Says In Neutral Initiation

Oppenheimer Bullish On Weight Watchers Margin Expansion Opportunities