Sonos: A Strong Value Bet On The Future Of Audio

With a 1,900 bps boost to FY21 revenue growth, an expected 28% to 31% YoY revenue growth, and a 2.5 P/S ratio, I start Sonos at very bullish.
Credit | Sonos

For my first Seeking Alpha article, (which obviously wasn’t published on SA), we’re taking a look at Sonos, the only audio product developer with a palindrome for a name. At least I’d assume so.

It also happens to be the one that I’m most bullish on, especially with a recent pullback into buying territory. Since reaching its 52-week high (and ATH) on April 16th, 2021, at 44.72, the company’s stock has slowly climbed back, retracing on its near 7-times increase in price from early-2020 to early-2021.

I picked up two shares at $14.07 in late June, racking up a whopping 128% return in about a year and a quarter — and, yes, that is a gain of $32. It’s not a lot by any means, but for context, I’m 16, buying stock off of a freelance writing income. Yeah.

Anyway, this is about Sonos, the company that now trades for a 21 P/E ratio. The same company also posted 90% YoY revenue growth in April and 52% growth in July. Off of record 2020 revenues, which were 5% higher, YoY.

Not What the Bears Remember…

After browsing for a company I’d want to write about (i.e., Sonos), I came across one of my favorite collections of SA articles. There’s a fantastic collection of both bearish posts and bullish posts, although the bears seem to remember things differently from how I do.

In an article by Nascent Trader, they placed a target price of $9.74 on SONO stock, a far cry from the $30+ it currently trades. But, of course, there’s a lot more in the article, covering the company’s moat, past fails, and lack of catalysts, although they don’t hold up as well today.

I’m not going to say that this article wasn’t well written or anything. Still, it focused primarily on past mistakes and ignored the direction in which Sonos CEO, Patrick Spence, has been pushing the company. He’s done a fantastic job at taking advantage of critical moments, releasing unique products, and moving the company towards something that has alluded it for years:

Profitability

The company is finally profitable! Yay!

For years it’s been a struggle, with Sonos posting TTM (trailing 12-month) earnings per share of anywhere between -$0.64 and $0.60 before successfully reinventing in mid-2020.

With earnings announced October 2020, Sonos released their quarterly report, saying the company whipped out $18.41 million in net income. That’d go for a 5.42% net profit margin and EPS of $0.15, on the back of 16% growth in revenue.

January 2021 brought 15% YoY increases in revenue, alongside net income of $132 million and EPS of $1.01, for a net profit margin of 20.49%. April dropped back to $17 million in net income for a 5.17% net profit margin, although, notably, on 90% increases in revenue.

In July’s report, Sonos reported $17.83 million in revenue, for a profit margin of 4.71% and EPS of $0.12. With this being the most recent report, the company averaged a 10.9% net profit margin, which is decently impressive for a very hardware-heavy product base.

Above all (and most importantly), it quickly cut the bear case of “no profitability history and no chance for it to happen.” That’s four straight quarters of profits and with no extraordinary conditions. So yeah, the massive boost to $132 million in January net income wasn’t thanks to some tax credit or anything — the revenue increases just boosted income alongside flat growth in operating costs.

Moats (and other barriers to progress)

Another primary argument was a lack of a moat, specifically against a company like Google, which provides significantly more firepower behind a product similar to Sonos’. 

Or well, until Google was legally recognized as infringing on Sonos’ patents, in addition to Sonos releasing some of the highest-quality, portable, budget speakers out there.

The new Sonos Roam boosted revenues, serving as one of the best-sounding Bluetooth speakers at a whopping $179. For reference, that’s not a lot, especially for a waterproof, drop resistant, 10-hour, voice-enabled, WiFi, and Bluetooth-based portable speaker.

Oh, and the company announced a significant partnership with Ikea, titled Symfonisk. This collection features eight products: two picture frames with WiFi speakers, two WiFi bookshelf speakers, two table lamps with WiFi speakers, and two wall brackets. 

While that might not seem too significant, it puts Sonos speakers right in front of the eyes of the over one billion annual visitors that make their way to Ikea. And they’re the only ones behind the collection. Just Sonos and Ikea. Two buds.

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Innovating in a Tight Space

Past the bears, though, Sonos has quite a few unique features that put them at a buy in my book. Like their expansion into audio streaming with Sonos Radio, multiple new speakers, advertising with Disney’s Disney+ service, and much more.

The company has exponentially increased its growth rates, pushing what was once a 2-5% CAGR business to one that could conceivably push out 15% CAGR over the next few years. That’s even ignoring Sonos’ estimates of around 30% growth this year.

A lot is going for the company right now, pumped up by supply chain issues, which have deferred demand further into the year. So whether it’s the growing EBITDA margins, gross margins, or whatever else, Sonos has quite a bit going for them right now.

On top of at least 15% CAGR for the next few years, Sonos will also gain market share heavily, as the home audio market will likely grow at a CAGR of around 7% until 2026.

Sheer Valuation

Oh, and yeah, on a technical basis, Sonos has that going for them too. Or, well, not necessarily technical, more so valuation-wise. I don’t really know how to use technical graphs yet 🙂

Anyway, remember that the company expects FY21 revenue growth to sit at 30 to 31%. While that doesn’t necessarily correlate directly to earnings growth, I’ll use a 60% growth rate for calculations.

Sonos is still quickly catching up on lost profitability, turning what was once negative into a consistent 16% EBITDA margin. Plus, according to the company, Sonos forecasts a 100% increase in EBITDA margins to 16% from around 8%. So I’ll apply that 100% jump to the estimated revenue growth (30%) to get a 60% growth for EBITA, at least in FY21 compared to FY20.

With up to 130% YoY increases in EPS, there’s not a necessarily great comparison for the company’s financials, so instead, I’ll be using that proprietary 60% growth for the following year.

Using the current 20.71 PE ratio recorded by Google (super reliable source, I know), we can calculate a PEG (price to earnings growth) ratio of 0.35. So compared to the Peter Lynch “hey, that’s pretty good” standard of 1, Sonos is relatively undervalued compared to its estimated EPS growth this year.

Looking to the Future

Oddly enough, at Sonos’ forecast $1.7 billion in FY21 revenue, we’re looking at a short-term price-to-sales ratio of just 2.38 (at $4.04 billion in market cap).

Let’s take Applied Materials, similar in gross margin and basic concept of manufacturing, well stuff, and run a quick comparison. We’ll find a company with slightly less YoY revenue growth over the last few months, with estimates close to Sonos’ 30-some-odd percent revenue growth.

However, AMAT trades at a PS ratio of 5.62, after declining 25% from its past 7.42 ratio. SONO trades at a PS ratio of 2.50 after falling 29% from 3.52. If that seems kind of similar on literally every level, you’d likely be correct. I’d hope so — since that would mean I’d be wrong too.

 

Anyway, excluding AMAT’s much higher revenue, there’s no reason why it should trade at a PS ratio more than twice that of SONO. Sonos is growing faster, boasts similar drops, gross margins, and more, and is valued cheaper. Plus, the company has multiple future catalysts, whether it be the final reopening, the continued move to at-home theaters, or Sonos Radio.

A lot is going for Sonos, and there’s no reason it should be as cheap as it is. The company is:

  • in great shape,
  • is currently profitable (which it hasn’t been before, and it’s been for four quarters in a row),
  • plans for 30% FY21 revenue growth, and potential 15-25% growth for the next few years,
  • has some fantastic EPS growth,
  • is cutting back on expenses,
  • faces a growing lawsuit against Google,
  • boasts cutting edge products, with a comprehensive backlog of releases,
  • has expanded advertising with major corporations,
  • and is doing so much more.

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