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Bull of the Day: Sonos, Inc. (SONO)

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Sonos (SONO - Free Report) is successfully challenging tech titans and growing its share of the expanding consumer technology market. SONO beat our Q4 FY21 estimates several weeks ago and lifted its guidance despite international supply chain bottlenecks. Sonos might also strike a nice chord with some investors because it’s trading around $30 a share.

Small Speakers, Loud Results

Sonos shipped its first product in 2005 and helped usher in the modern, higher-end speaker age. Today, the speaker company competes in a somewhat crowed connected speaker space alongside Bose and other audio-focused firms, as well as global powers such as Apple and Google.

Sonos specializes in wireless and multi-room sound systems and aims to attract music and movie lovers alike with a growing amphitheater of offerings. The Santa Barbra, California-based company doesn’t attempt to be a voice assistant speaker firm, though its devices can be set up for Amazon Alexa or Google Assistant. Instead, Sonos attracts consumers who want big, high-quality, dynamic sound.  

Sonos sells a range of sleek, connected speakers, subwoofers, soundbars for TVs, and more, normally in black or white. The company earlier this year entered the popular portable smart speaker market with its new $179 mass-market Roam speaker, which is now its lowest-cost device. It also sells what it calls architectural speakers that can be built into walls or ceilings.

A big portion of Sonos business comes from repeat customers who added to their collections for a home theater or connected speakers throughout the home. Its baseline speaker starts at $179 and packages can over $2,000.

The firm is slowly building out its non-speaker business. This includes its $7.99 a month, ad-free Sonos Radio HD that it launched last November, which it pitches as “the highest quality sound of any radio streaming service.”

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2021 Overview

Sonos posted impressive fiscal 2021 results (period ended on October 2) on November 17. The company’s full-year revenue soared roughly 30% to $1.72 billion and its adjusted earnings skyrocketed from $0.67 to $1.77 a share. It also crushed our Q4 earnings estimates, having posted adjusted EPS of +$0.08 a share vs. the Zacks consensus estimate that called for a -$0.11 a share loss.

Sonos FY21 gross margin climb by 4.1% to 47.2% and its free cash flow came in at $208 million, up from $129 million last year. The company also boasts a strong balance sheet, closing last year with $640 million in cash and equivalents alone ($1.14 billion in total assets), against total liabilities of $569.7 million and zero long-term debt.

As we touched on earlier, Sonos has amassed a growing and loyal customer base, with households up 15% last year to 12.6 million. “We consistently see our existing customers adding more products to their systems, and with every new household that we add, that flywheel begins…” CEO Patrick Spence said in prepared Q4 remarks. 

“Total products per household increased to 3.0, underscoring the power of our model and we are poised to drive further increases in customer lifetime value as we continue to innovate and introduce new products and services.”

Outlook

Sonos is coming off its best year since it went public in 2018, posting 30% revenue growth, driven by increased home-focused spending. This topped FY20’s 5% top-line expansion and 11% in 2019. And Sonos executive raised their 2022 guidance, confident the speaker firm can work through the messy global supply chain. 

Sonos said it is in the midst of “powerful momentum” that pushed it “ahead of schedule” on its fiscal 2024 financial goals. The company said it’s “confident in” its “ability to deliver an approximately 13% revenue CAGR, 45% to 47% gross margin, and 15% to 18% adjusted EBITDA margin through fiscal 2024.”

Sonos faces near-term setbacks as it comes up against a hard to compete against stretch, coupled with rising costs and other economic headwinds. Still, Zacks estimates call for Sonos revenue to climb 14% this year and another 12.3% in FY23 to reach $2.19 billion. Its adjusted earnings are projected to slip 27% this year before bouncing back in FY23.

Despite the somewhat disappointing bottom-line outlook, its fiscal 2022 and 2023 consensus estimates are up 10% and 6%, respectively from where they were prior to its release. This is part of consistent upward revisions over the last two years and Sonos has easily topped our bottom-line estimates in the trailing four periods.

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Price Movement and Valuation

The speaker firm’s strong results in mid-November were received without much fanfare and SONO has fallen over 8% in the last month. The recent downturn is part of a substantial drop since the end of August when many growth names first started to fade. Sonos did make a brief comeback alongside the market, but it is currently trading 25% below its late summer levels and nearly 30% under its April records of $44 a share.

Even with the fall, Sonos stock is up 140% in the last two years to nearly double its industry. Sonos does trade below both its 50-day and 200-day moving averages, which might scare off some investors. But it is closer to oversold RSI levels than neutral. This means some buyers might start to step in soon.

The pullback has recalibrated its valuation in a big way, with Sonos trading right near its own year-long lows at 23.7X forward 12-month earnings. This marks a 50% discount to its own highs during this stretch and it comes in not too far above its industry’s average and the S&P 500.

Bottom Line

The high-quality speaker firm’s bottom-line revisions help it land a Zacks Rank #1 (Strong Buy) right now, and four of the six brokerage recommendations Zacks has are either “Strong Buys” or “Buys.” The company is also returning value through a recently-increased round of stock buybacks. On top of that, SONO’s current Zacks consensus price target marks 52% upside to Wednesday’s closing levels.


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