Will Sonos IPO Bring Music To Investors Ears? Key learnings from Sonos’s IPO filing
July 30, 2018 | Blog

Will Sonos IPO Bring Music To Investors Ears? Key learnings from Sonos’s IPO filing

With sales quickly approaching $1 billion, wireless speaker maker Sonos has filed to go public. According to its updated S1-filing, the company expects to price between $17 and $19 a share, implying a market cap of up to $1.9 billion and a 1.9x EV/Revenue multiple. While this IPO valuation is roughly 30 percent below its previously targeted valuation of $2.75 billion, the figure remains 2.8x above its $682 million private valuation as of June 2012. Sonos plans to raise up to $105 million and its selling shareholders plan to offer shares worth up to $159 million. The Santa Barbara company faces a tough market as pure-play consumer hardware companies have continued to struggle in an increasingly competitive market.

Founded in 2002 by John MacFarlane, Craig Shelburne, Tom Cullen and Trung, Sonos revolutionized the speaker category with popular wireless audio systems like Play, Sonos Beam and Playbar. The company integrated Sonos One, its latest product, with Amazon’s Alexa voice assistant. With an estimated value of $2.75 billion, Sonos is one of the largest consumer electronics companies to go public over the past 5 years, after Fitbit and GoPro. Like other unicorns, Sonos is hoping to ride the booming IPO market this year, but faces stiff competition from the tech giants Amazon, Apple and Google, as well as peers such as Bose and JBL.

Despite the company’s well-defined brand and technology, history has not been kind to pure play consumer hardware companies. Since its IPO, FitBit’s valuation has plunged to $1.6 billion from $6.1 billion, while GoPro’s market cap fell to less than $1 billion from $3.9 billion. Since Sonos generates nearly all of its revenue from one-time sales of hardware, the company could meet a similar fate.

The Upside Scenarios:

Early mover advantage in the wireless and multi-room speaker market. Known for its innovative design and technology, Sonos was the first company to introduce wireless, multi-room audio speakers to the market. Products such as the Sonos Playbar and Play provide seamless wireless integration and deliver excellent audio quality. Thanks to these products, Sonos today boasts a customer base to 6.9 million, about 7 times more than what it had in 2013. Over 50 percent of Sonos’s customers live outside the United States, and 61 percent of customers own more than one product.

Strong tailwinds from the music streaming industry. Streaming services have transformed the way we consume music by allowing listeners to play music on demand without the need for devices to store audio files. Sonos’s product strategy complements the growing demand for these services by allowing listeners to wirelessly stream music directly to Sonos speakers. The company was quick to partner with Spotify, Apple Music and Pandora and we expect to see more such alliances in the future.

Consistent Gross and EBITDA marigins Sonos has generated consistent gross margins of about 46 percent on average for the past 5 years even though revenues have been growing only at about 9 percent on average year over year. The company has also been able to maintain positive cash flows and EBITDA margins of about 4 percent on average for most of the past 5 years. In the most recent six month period, Sonos boasted a better-than-average EBITDA margin of 7.7 percent, thanks to efforts to reduce operational expenses, especially in sales and marketing.

Exhibit 1: Positive EBITDA for most of the past 5 years
Exhibit 1: Positive EBITDA for most of the past 5 years
Source: SharesPost Research; Sonos S1 filings

Vast and growing patent repository. Sonos has amassed 630 patents, with 570 more patent applications pending in wireless audio technology. The company ranked second in electronics patents last year. Although Sonos does not disclose licensing revenues, we expect licensing to grow as more players enter the wireless audio space.

Integration with Alexa and Apple Airplay. The emergence of voice assisted speakers from Amazon and Google have challenged pure play speaker companies. Unlike its peers, Sonos quickly partnered with the big tech to integrate their respective technologies. Sonos One and Sonos Beam, released in October 2017, feature Amazon’s Alexa voice assistant. The company has also partnered with Apple to integrate airplay into its speaker products for iPhone users.

The Downside Risks:

Increasing competition from the tech giants and peers. Although Sonos tops the market for high quality audio systems, the market is shifting toward smart assistant-powered speakers, such as Amazon Echo, Google Home and Apple Homepod. The tech companies use smart speakers as just another product to complement their myriad of services and support their overall brand, making it tough for pure-play hardware makers such as Sonos to effectively compete with them. Peers such as Bose and JBL are also quickly catching up, building up the overall competition in the wireless speaker segment.

Maturing revenues and flattening product sales. Sonos has been releasing products at a regular pace, but revenues have not kept pace, partly because of increased competition from Amazon and Google. Despite advanced, voice assisted integrated speakers, such as Sonos One, the company has posted tepid revenue growth of about 10 percent for the past three years. New product launches have not significantly boosted sales either. Over the past three years, the company averaged a lower than expected 9 percent growth in number of products sold.

Exhibit 2: Lack luster revenue growth despite new product launches
Source: SharesPost Research; Sonos S1 filings
Exhibit 3: Product sales flattened over past 3 years
Source: SharesPost Research; Sonos S1 filings

Non-diversified and non-recurring revenue stream. That Sonos’ revenues come from just speaker sales, which are typically one- time sales with no recurring revenue, should worry investors. Given the high price of Sonos’s products, ranging from $149 to $699, consumers are less likely to refresh their products on a regular basis. To ramp up revenues, the company should use its audio expertise and expand its product portfolio beyond home speakers. Headphones and car audio seem like ideal adjacent markets for Sonos to expand into.

High interest expenses. The company signed a $40 million loan agreement with Gordon Brothers Finance Company at a high interest rate of 11.2 percent. The loan has resulted in high interest expenses, which we expect to continue into 2021. We’re not even sure if Sonos will generate a profit by then. We believe Amazon and Google’s successful launch of smart speakers has eroded investor interest in Sonos, which is why the company took out such an expensive loan.

Exhibit 4: Rapidly growing interest burden due to fading investor interest
Source: SharesPost Research; Sonos S1 filings

Market concentration in the United States and Europe. Sonos generates 94 percent of its revenue from just the United States and Europe. The much larger Asia-Pacific region accounts for just 4 percent of sales as of March 2018. Given tough competition from the tech giants in the west, Sonos should increase its focus on the Asia-Pacific market and leverage its brand image to boost revenue growth.

Exhibit 5: Market heavily concentrated in US and Europe
Source: SharesPost Research; Sonos S1 filings

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This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

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Alejandro Ortiz

Alejandro Ortiz

Alejandro is a Research Analyst, Private Investment Research for SharesPost Research LLC. Prior to joining SharesPost, he was a Valuation Analyst at Duff & Phelps with a focus on TMT industries.

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation, and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own financial advisors before making any investment decisions. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about the subject matter therein, including all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be during their employ directly or indirectly related to their specific views contained in this report.

Analyst compensation is indirectly based upon the growth and success of SharesPost, Inc., including the overall performance of its subsidiaries, the individualized performance of any such analyst, and the development and progression of the overall research effort. SharesPost, Inc. earns revenue from, among other avenues, brokerage sales, and therefore the analyst may indirectly benefit from research reports that have the ultimate effect of increasing trading activity, either through SharesPost Financial Corporation and/or with SharesPost Investment Management, LLC.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.