Is Sonos Stock a Good Investment?

Sonos, Inc. (NASDAQ:SONO) has historically made room audio systems but is moving into a new audio market segment. In light of the company’s past history of innovation, the venture has been eagerly anticipated by investors.

We’ll get to precisely what it is in a moment but first, if you are not familiar with Sonos, it has been delivering multi-room wireless sound systems to households for nearly two decades. The platform supports over 100 streaming services, including Spotify, Apple Music, and Deezer. 

For the most part, Sonos derives its revenues from speaker products that are sold in more than 60 countries. So, what does the future hold for Sonos? Is it set to rekindle former glories?

International Success A Key Revenue Driver

Impressive international growth has been a contributing factor as to why the company went public in 2018 and seen revenue growth in every fiscal year except for last year. For the most part, the revenue driver has been speakers, which accounted for 80% of total revenues.

Last year, though, the top line fell by 5.5% to approximately $1.66 billion due to fewer orders from retail and installer solutions providers and a general softening of demand.

Slower sales also hurt the bottom line with Sonos returning to net losses after two years of positive net income on a GAAP basis.

Adjusted EBITDA, which had enjoyed a solid upswing in the first three years post-IPO, began to decline. The highest  margin for this metric was recorded in FY2021 at 16.2%, but it has been decreasing since then.

Management acknowledged that a number of its categories are under pressure and certainly this was evident in the first half of fiscal 2024, with an 11.4% revenue drop compared to the previous year. Although Sonos reported a net income of $11.24 million, this was a nearly 75% decline from the prior-year period.

So with the financials feeling the squeeze, what can Sonos investors look forward to?

What You Don’t Know About Sonos

While Sonos may be feeling the pinch on the financials now, it’s not a stock to count out anytime soon.

It’s got a number of assets and untapped opportunities that many investors aren’t fully aware of. For example, Sonos holds over 2,000 patents, an intellectual property asset that spans various technologies, including voice recognition, wireless communication, and audio processing. 

The company’s IP portfolio not only protects Sonos from rivals looking to encroach on its business but also positions it as a leader in audio innovation.

Moreover, Sonos deserves its reputation as a leading provider and its reputation for delivering quality products has opened doors for it to partner with major companies to expand its market reach. For example, working with IKEA has proven to be a boon, resulting in the SYMFONISK line of products that combine Sonos’ audio expertise with IKEA’s design and distribution network. 

Finally, Sonos is augmenting its business by entering the commercial audio market, targeting businesses and public spaces. The idea behind the move is to diversify revenue sources and tap into a new customer base, resulting in a potential growth lever beyond the consumer market.

The company’s new line of products, Sonos Pro, aims to provide high-quality audio solutions for offices, retail stores, and hospitality venues.

Is A Return To Growth On The Horizon?

In its most recent earnings report for Q2 FY2024, Sonos reported revenue of $332.9 million, a fall from $378.7 million in the same quarter the previous year. The net loss for the quarter was $30.7 million, compared to a net income of $17.8 million in Q2 FY2023.

Despite these disappointments, gross margin rose to 46.8%, up from 44.1% in the previous year, indicating better cost management and pricing strategies.

CEO Patrick Spence highlighted that the company is investing heavily in research and development with R&D expenses climbing to $53.8 million in Q2 FY2024, up from $49.2 million in Q2 FY2023.

These investments are set to pay off with forecasts for annualized top line growth of approximately 6.2% going forward for the next 5 years.

Who Competes With Sonos?

Make no bones about it, Sonos competes at the upper end of the market and holds a strong position in the premium audio market, with approximately 9% penetration in affluent U.S. households and 2% in the global audio market.

While it’s a sizeable chunk of the market, Sonos has lots of room to take market share, especially as it expands its product lineup and enters new market segments.

Nonetheless, there are no shortage of well-known brands looking to stifle its march forward, with stiff competition coming from well-established brands like Apple (NASDAQ: AAPL) and Sony (NYSE: SONY), as well as Bose.

In spite of the harsh competitive landscape, CEO Spence sees a $5 billion market opportunity for Ace, the company’s first-ever headphones, driven by strong consumer demand for high-quality personal audio devices.

For the coming fiscal year, management forecasts revenue between $1.6 billion and $1.7 billion, indicating flat growth year-over-year at the midpoint but, on a more positive note, expects to benefit from its multi-year product cycle and ongoing R&D efforts.

Regardless of the anticipated top line plateau, Wall Street analysts are optimistic about Sonos’ future and have a $23 upside price target.

Is Sonos Stock a Good Investment?

The consensus among five analysts is that Sonos stock is a good investment with 75.7% upside to fair value of $23 per share.

Opportunities are indeed brewing for Sonos, particularly with the upcoming Ace launch. Although competition is fierce, Sonos has an opportunity to make a splash in a new market. 

So, the bottom line is while Sonos does face financial headwinds and a growth slowdown, its innovative strategies and market expansion efforts make it well worth considering and offers the very real potential for growth, profitability and share price appreciation.

The combination of a strong patent portfolio, meaningful partnerships that offer broad distribution, market expansion, and promising new products puts Sonos in a great spot to ride a bullish wave with significant upside potential.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.