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Buy Cheap Consumer Tech Stock Sonos Down 20% Before Earnings?

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The Nasdaq fell 2.55% on Monday, as Wall Street sold growth tech stocks across the board. The downturn comes as investors continue the cyclical trade that kicked into gear after the election and the first vaccine news back in November.

Monday’s downturn pushed the Nasdaq below its 50-day moving average, but the index is still up 46% in the past year and 4% in 2021. Tech stocks might find the environment challenging in the near-term, with the Nasdaq 5% off its records, but investors with long-term horizons might want to remain on the hunt, especially for hard-hit names.

One such stock might fit the bill: high-end home audio firm Sonos (SONO - Free Report) . The stock fell 7% during regular trading hours Monday, ahead of its second quarter fiscal 2021 financial release on Wednesday, May 12.

Getting Louder?

The current backdrop might be hurting the growth-focused technology stocks that thrived during the early months of the pandemic. Even though Sonos sits in the broader tech world, it’s a high-end consumer goods company at its core and its growth outlook is strong.

Sonos is a home audio firm that specializes in wireless and multi-room sound systems and is often compared to Bose. The company sells a range of sleek, connected speakers, subwoofers, soundbars for TVs, and more, enabling people to build on their home audio collections—its baseline speaker starts at $179. And it has benefited as part of a larger shift to modern, connected devices that are often much smaller than their older peers.

Sonos sells its speakers individually and in packages, with surround sound sets that cost up to $1,900. The speaker firm’s quality and functionality help it thrive in a crowded market that includes tech titans like Apple (AAPL - Free Report) . SONO also sells what it calls architectural speakers and sound systems that can be placed in walls and ceilings.

Sonos in early March 9 announced its entry into the widely popular portable smart speaker market. The WiFi and Bluetooth-enabled Roam costs $169 and is now its most mass appeal speaker. Investors should also note that Sonos in November rolled out its new ad-free, HD streaming tier of its radio service. Sonos Radio HD costs $7.99 a month and competes against Spotify (SPOT - Free Report) , Apple Music, Amazon Music Unlimited (AMZN - Free Report) , and others.

Price Movement & Valuation

Sonos stock struggled after its 2018 IPO. The stock then took off from the market’s coronavirus lows, alongside countless other tech stocks and consumer businesses that succeeded during rough conditions. SONO jumped from around $9 in March 2020 to over $15 by July.

The stock then skyrocketed in November after it crushed Q4 estimates and announced a new $50 million repurchase program. The stock made another huge leap following strong Q1 FY21 results in February. Overall, SONO is up 255% in the past year and 50% in 2021. The run includes a 20% fall from its mid-April records, with it down from $44 to $34.85 a share at the close Monday, which is a price tag some investors might consider cheap.

Along with its actual price, Sonos has fallen right near overbought RSI territory (30) at 30.5. Sonos hasn’t been anywhere near this range in the past year. In fact, it broke below 40 for the first time since September earlier this month. The downturn has also pushed the stock below its 50-day moving average for the first time since then.

Along with its price tag, SONO trades at 2.7X forward 12-month sales. This is 15% below its own year-long highs and just underneath the Zacks Consumer Discretionary Sector’s 2.8X, despite its massive outperformance—255% vs 44% in the past year.  

Recent Performance & Outlook

Sonos Q1 revenue climbed 15% for the second quarter in a row and its Free cash flow jumped 97% to $203 million. Plus, it added a record number of new customers and saw a record number of existing customers add to their collections. Sonos and its “industry-leading gross margins” jumped nearly 6% to 46.4%, as it boosts its direct-to-consumer segment.

Sonos Q2 revenue is projected to surge 44% from an easier-to-compare period last year to reach $251.5 million, based on Zacks estimates. It is also projected to cut its adjusted loss from -$0.48 to -$0.22 a share. Its fiscal 2021 sales are then projected to climb 18% to $1.6 billion, with FY22 projected to jump 10.4% higher.

These would top FY20’s 5% sales growth and compare well against 2019’s 11% expansion. Plus, SONO is expected to soar from an adjusted loss of -$0.18 a share last year to +$0.78 in FY21, with FY22 set to climb another 21% higher to reach $0.95 a share.

Bottom Line

Sonos has easily beaten our bottom-line estimates in the trailing three quarters and its positive adjusted EPS revisions activity helps it land a Zacks Rank #1 (Strong Buy) right now. The stock also grabs an “A” grade for Growth in our Style Scores system and its Audio Video Production space ranks in the top 35% of our over 250 Zacks industries. And four of the seven brokerage recommendations Zacks has are “Strong Buy” or “Buys,” with none below a “Hold.”

Clearly, playing SONO for near-term growth after earnings comes with risks, heightened by the recent volatility and tech selling. Yet, longer-term investors might want to consider the consumer technology stock for its ability to expand and standout within an industry that’s growing louder. 

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