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Why This Cheap Stock is a Strong Buy Right Now

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Home audio standout Sonos (SONO - Free Report) topped fourth quarter fiscal 2021 earnings estimates on November 17. The company also raised its guidance in the face of global supply chain worries. And those are just a few of the reasons why investors might want to consider the lower-priced tech-focused retailer.

Turning Up the Volume

Sonos is a speaker company that competes against Bose and others such as Apple (AAPL - Free Report) in the higher-end home audio market. The Santa Barbra, California-based company specializes in wireless and multi-room sound systems.

Sonos sells a range of sleek, connected speakers, subwoofers, soundbars for TVs, and more. Its baseline speakers start at around $200 and packages can cost over $2,000. The company in April finally entered the popular portable smart speaker space with its new $179 mass-market Roam speaker. And it also sells what it calls architectural speakers that can be built into walls or ceilings.

Sonos has benefited from the larger shift to modern, connected devices and it’s poised to gain as more people spend on home-based upgrades. The firm is also expanding its non-speaker business, with an ad-free streaming tier of its music service dubbed Sonos Radio HD. The subscription service costs $7.99 a month and competes against Spotify, Apple Music, and other streaming platforms.

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Growing Even Louder?

Sonos went public in 2018 and its revenue climbed 11% in fiscal 2019 and 5% last year. The company then posted blowout results in its FY21, which ended on October 2. Its full-year revenue soared 30% to $1.72 billion and its adjusted earnings skyrocketed from $0.67 to $1.77 a share. The company also easily topped our Q4 EPS estimate.

Broad-based, home-focused spending helped support some of the growth. The firm also stands to benefit for years to come as people invest in modern, tech-infused offerings for their homes, offices, and beyond.

Perhaps most importantly, Sonos has built up a loyal customer base, full of repeat buyers. Its total households climbed 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 fourth quarter 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.”

Sonos executives raised their 2022 guidance in the face of global supply chain bottlenecks. Plus, the firm said its “powerful momentum” has it “ahead of schedule” for reaching the fiscal 2024 financial targets it first laid out last March.

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.”

Looking ahead, 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 from its hard-to-compete-against FY21, before bouncing back in FY23. And its overall FY22 and FY23 consensus EPS estimates have climbed since its release.

Bottom Line

The speaker firm's strong bottom-line revisions help it grab a Zacks Rank #1 (Strong Buy) right now. Plus, Sonos has now crushed our bottom-line estimates over the last year-plus.

The stock also grabs “A” grades for Growth and Momentum in our Style Scores system, and five of the seven brokerage recommendations Zacks has are either “Strong Buys” or “Buys,” with nothing below a “Hold.” And Sonos executives announced a new stock buyback program recently.

Despite the strong results, the stock is trading below where it was on November 17. SONO is also down around 17% in the last three months and it closed regular hours Monday about 27% below its April records at $32.21 a share. Plus, its current Zacks consensus price target of $47.80 a share marks roughly 50% upside to Monday’s levels.

Sonos does sit below both its 50-day and 200-day moving averages and it has continued to struggle over the last several months after its huge covid rally sent it from under $10 in March 2020 to over $40 in April. On the valuation front, Sonos is trading right near its own year-long lows at 23.8X forward 12-month earnings. This marks a 50% discount to its own high during this stretch and it comes in not too far above its industry’s average.

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