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Sonos IPO Gets Priced Lower Than Expected, Does that Make it a Buy?

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It’s not too difficult to remember the days when consumers bought music on LPs, cassette tapes and compact discs. Streaming music services have changed all of that in a hurry as streaming services have revolutionized the delivery of music on demand. Industry pioneer Spotify (SPOT) went public earlier this in an interesting and non-conventional direct public offering and shares have performed well, up 36% in 2018. Apple’s iTunes, (AAPL - Free Report) Amazon (AMZN - Free Report) and Pandora all also offer music fans inexpensive instant access to the content they desire.


As consumers switch to streaming internet sources for music, they also need speakers to play that music on and Sonos (SONO), founded in 2002, has become the most popular maker of speaker systems with a product line that ranges from compact portable units to sophisticated home systems capable of customizing music across multiple rooms with innovative network connectivity.


In its highly anticipated initial public offering on Thursday, Sonos’ underwriters priced its shares at $15, valuing the company at $1.5 billion. In the first few hours of trading, the shares rallied roughly 20% on the open market, trading around $18.


Though this would seem on the surface to be a successful IPO, the total market cap is about half of what was expected earlier this year. The issue seems to be that Sonos’ continued success is dependent on a deal with Amazon to make it’s products compatible with the Alexa voice recognition software – so that users can call up their music choices verbally – and a similar deal expected later in 2018 to incorporate the same functionality with Google’s Assistant.


Official financial data from Sonos’ SEC filing documents reveal revenues of $992 million in 2017 and a net loss of $14 million, improvements from 2016 when they lost $36 million on $901 million in sales. For the first half of the 2018 fiscal year, Sonos produced a net profit of $13 million.


Financial data on newly traded companies is typically scant, so it will take a few quarters for analysts to get a clear picture of expected growth in the company but at 16 years-old, Sonus is actually a fairly mature company and the recent trends seem to portend a move toward consistent profitability.


The big issue facing investors is the predictability of continued collaboration with Amazon, Google and other like them in the future. With a highly-regarded product line and loyal customers – buyers of their products tend to become repeat customers – Sonos appears to be on the way to sustained profitability.


On the other hand, the fact that they sell only hardware products probably limits potential margin growth compared to companies who sell digital and downloadable products and Sonos’ reliance on partnerships increases the chances they could be marginalized by much bigger companies who could choose to enter the physical speaker market themselves and cut into Sonos’ market share.


If they stay on their current trajectory, Sonos seems like a solid investment opportunity, but investors should probably not expect the type of rapid revenue and earnings growth of other recent technology offerings.

 

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