Sonos (SONO)

There are not many companies out there that can take on the likes of Apple and Amazon at their own game and come away a winner. The two tech giants throw billions of dollars into research and development and have ecosystems that make it incredibly hard to prise customers away. To beat them you have to offer high-quality products that are distinctive and innovative. Today’s stock report subject Sonos is managing to do just that.

You may have heard of Sonos. They make audio products, specialising in multi-room audio. They offer smart speakers and home theatre sound systems including soundbars and subwoofers that can be linked via a phone app throughout the house. They have partnered with all of the major music services including Spotify, Amazon Music and Apple, and their systems are compatible with the three major voice assistants Amazon Alexa, Google Assistant and Apple Siri. Although their purchase of AI tech company Snips in 2019 suggests they are also trying to build their own.

Sonos were the pioneers of wireless multiroom audio. They are high-end products with a high-end price tag. They are certainly not the most expensive out there but they aren’t your run of the mill speaker systems either. Their usability via the Sonos app, the sound quality on offer, and the durability of the hardware have meant customers have so far been willing to pay a little bit extra for their products. They appeal to customers who want to spend more on quality without getting into the crazy high prices that audiophiles and sound nerds sometimes spend on their systems.

The Sonos share price suffered a large pullback in late August-early September following its Q3 earnings release. This was despite the fact that it easily beat estimates on both the top and bottom line and increased guidance. They made $0.27c per share in the June quarter when analysts were expecting a $0.17c loss. While revenue came in at $378.7 million – $65 million more than expected. Revenue grew 51.9% year on year, while management said they now expect 2021 fiscal revenue to hit $1.695 billion to $1.710 billion when the market was only looking for $1.66 billion. They are pretty impressive numbers – so why the fall?

Well, it’s the same problem that most product manufacturers have been experiencing – especially technology-based ones. Management has made it clear that supply chain disruptions have had an impact on sales, including difficulties in getting hold of semi-conductors. It’s likely that these issues will continue into 2022 but will hopefully ease at some stage throughout the year. The good news is that Sonos has been thriving despite the challenges and will most likely thrive when they aren’t there.

Management also pointed to inflation as a problem – as have many other companies in the round of most recent earnings calls. And higher shipping costs have also put a dent in expenses. Sonos anticipated these issues and have jumped ahead of them by raising their prices a few months ago by as much as 6-13% for some products. Because they are considered higher-end products I’m guessing that customers won’t mind paying a little more. They have already made the decision to pay extra for quality and I imagine a small price rise will have little impact on that decision.

As well as an impressive earnings beat Sonos had another win in August. They have been locked in a legal war with Google since January 2020 with Sonos accusing Google of infringing on five patents relating to its smart speakers, and then the issue expanding with more suits from both sides. An initial ruling from the International Trade Commission has now ruled in favour of Sonos and while not yet definitive will likely mean that Google may need to pay royalties to Sonos going forward. Sonos has said the decision “is only a first step in a lengthy battle” however it is an “important milestone in the ongoing effort to defend Sonos’ technology against Google.”

The share price has bounced back off of its recent lows following the August/September price dip and looks set to continue higher. It’s trading at around 25 price to earnings and forward price to earnings, and with the price rises they have instituted I can see margins increasing and profits rising more than expected. The work from home phenomenon will only increase interest in Sonos products as consumers increase spending on home comforts, and the next few years could prove to be extremely fruitful for the company. Look out for earnings on November 17 and buy on any dips.