Sonos
Sonos Inc.’s loyal customer base, premium products, and platform-neutral ecosystem may not be enough to help the company withstand the competitive landscape for smart speakers, some analysts argue.
At least three analysts initiated coverage of Sonos’ stock SONO, -5.30% with hold ratings on Monday, citing competition from Amazon.com Inc. AMZN, +0.77% Apple Inc. AAPL, +0.93% Alphabet Inc. GOOGL, +1.38% and others, as well as the company’s current valuation. Three more analysts started coverage with buy ratings.
In question is whether Sonos can avoid the fate of Fitbit Inc. FIT, +4.14% and GoPro Inc. GPRO, -0.39% two hardware companies that have seen their stocks plummet since their hot initial public offerings.
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Sonos shares were down 4.7% in midday trading, though they’d been indicating higher premarket.
Jefferies analyst Brent Thill, who began coverage with a hold rating and a $23 price target, is concerned about the company’s growth profile. He sees “no high-growth revenue catalyst on the horizon,” though he noted that the company plans to start releasing two new products a year for the first time in an attempt to jolt growth.
Thill also discussed the competitive environment for smart speakers, writing that companies like Google and Amazon can afford to subsidize smart speakers to help their voice assistants gain acceptance. Sonos, on the other hand, focuses on higher-end products.
“While the experience is premium, the higher price point of Sonos’ products makes it a difficult hurdle for consumers in the low-mid tier range (compared to low priced speakers like Amazon’s Echo for $99 or Echo dot for $50),” Thill commented.
Stifel analyst Matthew Sheerin views Sonos’ high-end positioning as a positive, though he still worries about “competition coming from all sides.” Amazon and Google now have more expensive models that are more in line with what Sonos offers, and other audio-focused companies are getting more serious about smart speakers.
“Despite that competition, we still see Sonos with a competitive edge due to its ‘sticky’ relationship with its large and loyal installed base, which should drive refreshes and add-on products; and Sonos’ ‘platform agnostic’ position with regard to third-party streaming services,” Sheerin wrote. He also said that the company’s path to profitability could be difficult and deems the stock fairly priced around current levels.
Sheerin has a hold rating and $20 price target on the stock, which recently changed hands at $19.22.
Morgan Stanley’s Katy Huberty, who began coverage with an equal-weight rating and $20 price target, said that the company’s new product launches will determine whether it avoids the fate of Fitbit and GoPro.
“If new products fail to meet expectations, we think the multiple will contract similar to Fitbit and GoPro after their initial product missteps,” Huberty wrote. (That equates to about one times revenue, or $7, per Morgan Stanley’s “bear case” valuation scenario.) She argued that the stock could trade more in line with shares of Logitech International SA LOGI, +1.14% and Garmin Inc. GRMN, +1.41% if its new products outperform expectations. That could mean a multiple of about three times revenue, which gives Huberty a $34 “bull case” valuation.
Huberty said she remains sidelined until she sees whether new items like the Beam, a sound bar, can exceed expectations.
Other analysts were more positive. RBC Capital Markets analyst Amit Daryanani initiated coverage with an outperform rating and a $25 price target, writing of his expectation for double-digit growth over the long run. The company is at the “unique intersection” of streaming music, Wi-Fi penetration, and voice assistants, all of which are technologies that should see increased usage over the next few years.
Daryanani doubts that the company will become the next Fitbit or GoPro because user engagement trends look strong; nearly half of registered households use the Sonos app daily. “Fitbit and GoPro had a strong initial surge of popularity but that user engagement for the devices likely declined after purchase.”
Goldman Sachs analyst Rod Hall is also bullish on the stock, beginning coverage at buy with a $25 price target.
“We believe Sonos’ increased product cadence will improve customer engagement in reaching beyond the company’s loyal customer base and we expect frequent product launches to help drive more consistent revenue growth,” Hall wrote. “Sonos also possesses what we see as valuable multiroom music streaming intellectual property that should be monetizeable over time.”
The company’s IP portfolio could enable it to bring multiple voice assistants into a single product, what Hall would deem to be a “unique ability.”
Raymond James analyst Adam Tindle, meanwhile, is upbeat about the company’s potential to expand into the portable-speaker market. “We see portable speakers as a natural extension into a total addressable market that should be north of $5 billion, and a product that would be additive to systems,” he wrote. “Beyond this areas such as headphones, and perhaps eventually automobiles, provide further growth vectors over time.”
Tindle has an outperform rating and $24 price target on the shares, which are up about 28% from their IPO price of $15.
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