Analysts Tune In To Sonos As IPO Quiet Period Expires

Analysts covering newly public Sonos, Inc. SONO consider the company’s customer engagement, market opportunities and product launches as key catalysts for success.

The Analysts

• Morgan Stanley analyst Katy Huberty initiated with a Equal-weight rating and $20 price target.
• Stifel analyst Matthew Sheerin initiated with a Hold rating and $20 price target.
• Jefferies analyst Brent Thill initiated with a Hold rating and $23 price target.
• Raymond James analyst Adam Tindle initiated with an Outperform rating and $24 price target.

The Thesis

Morgan Stanley's initiation comes pending evidence of new products outperforming forecasts, Huberty said. 

Sonos owns important intellectual property in enabling wireless connectivity for speakers and streaming services, the analyst said. 

“To maintain differentiation in a crowded $18-billion home audio market, Sonos must leverage its technology stack to expand into new use cases for new and existing households (we collectively call new 'rooms') and deepen its integration with streaming, voice and home automation platforms ('smart' capabilities),” Huberty said.

Stifel's Sheerin said Sonos has a solid market position and brand awareness, despite the heavy competitive landscape.

Recent data demonstrates that 84 percent of audio professionals recommend Sonos, while 57 percent recommend the brand specifically for Wi-Fi speakers, the analyst said. 

"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 (it supports 100) as well as the three major voice-recognition platforms (Amazon-Alexa, Apple-Siri and OK-Google, which should be available by year's end)," Sheerin said. 

Jefferies' Thill refers to Sonos as "The Lego of speakers with consistent but low growth," noting that while revenue has increased 9 percent, analysts remain skeptical of breakout revenue growth. Sonos has an agnostic platform, the opportunity to expand into new verticals and a strong portfolio of patents and technology as catalysts going forward, he said. 

Conversely, the lack of high growth revenue, increasingly competitive landscape and an evolving untested business model are headwinds that drive Thill's hesitance, according to the note. 

According to Tindle, Sonos demonstrates strong brand leadership, an emphatic customer base and tighter cost controls. "We see SONO as a stock in which solid revenue growth, stable gross margin, and an improved operating structure should lead to meaningful EBITDA growth, and these tend to be winners," he said. 

Raymond James' Tindle referenced the company's new management as a strong catalyst.

"While [the] adjusted EBITDA margin has hovered in the 5-percent range, we believe the combination of a 40-percent-plus gross margin and a more efficient operating structure should lead to an adjusted EBITDA margin more than double the current profile. We analyze a recent industry turnaround story to show how a template exists."

Price Action

Sonos shares were slipping 3.7 percent to $19.46 at the time of publication Monday morning. 

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Photo courtesy of Sonos.