Sonos: Trade Sale Possibilities, Otherwise A Short

Feb. 15, 2019 7:00 AM ETSonos, Inc. (SONO)AAPL17 Comments
Robert Honeywill profile picture
Robert Honeywill


  • As predicted in my article, “Sonos: Long The Products - Short The Shares”, published ahead of the Sonos Q1-2019 earnings release, results for revenue and EPS surprised to the upside.
  • Also, as predicted, the results confirmed Sonos is suffering from a continuing decline in gross margins that is proving intractable. Cutting sales and marketing expense is not a solution.
  • Based on share volume since the end of Sonos’ 180 day IPO lock-up on January 28, many of Sonos’ pre-IPO investors, not subject Rule 144 restrictions, will have now exited.
  • That leaves an overhang of ~51 million shares held by 5% investors, over half the float, free to sell following the earnings release, and undoubtedly looking for an early exit.
  • This idea was discussed in more depth with members of my private investing community, Analysts' Corner. Start your free trial today »

Sonos’ Short Thesis

The two factors discussed in my article, “Sonos: Long The Products – Short The Shares”, are still in play, following the events of the past week, culminating in the company’s first quarter earnings release, after market close on Wednesday February 6. A third factor, involving a caveat, also needs to be taken into consideration.

  • Factor 1 - the need, for private and institutional venture capitalists, to exit their investments in Sonos at the best possible price.
  • Factor 2 - the fundamentals of Sonos’ business do not support the current share price level, now or in the future.
  • Factor 3 - In my previous article, I noted the possibility of a secondary offering to facilitate exit of the 5% shareholders, holding ~51 million shares. An alternative possibility is a trade sale. I do think that poses some difficulties. But, a trade sale would destroy the short thesis.

Sonos Short Thesis Factor 1 – Sell High, Cover Low, Expect Share Price Support To Wane

The elevated share price over the past fortnight, has undoubtedly enabled many of the Sonos early stage, pre-IPO investors to achieve an exit. The share price achieved by these investors would be in the ~$11 to $13+ range. This would likely be disappointing for these investors, as the IPO price was $15, and in the period immediately after IPO, share price rose above $22. TABLE 2 further below, shows details of the pre-IPO investors, holding ~31 million shares, and not subject to Rule 144 restrictions. These shareholders were free to trade their 31 million shares, from and including January 29, the first day after the end of the IPO lock-up period. Volume of shares for the 11 trading days, January 29 to February 13, was a little over 40 million per TABLE 1 below.

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This article was written by

Robert Honeywill profile picture
I am a retired accountant with a background in large mining projects, from feasibility to full-scale operation, large scale primary industry and food processing, commercialisation of university intellectual property, and consulting to small businesses, government departments and insolvency practitioners. I have gained a wealth of experience from having the extreme good fortune to work, in a cooperative environment, with so many people far more intelligent and smarter than me; from scientists and engineers with MBA qualifications, to University professors across a range of disciplines. Through the accident of mergers, acquisitions and dispositions, I held, at various times, financial controller positions within Utah International Inc, General Electric Inc, and BHP Billiton organizations. If I have a special skill, it is in methods of assessment of projects with long lives, where costs are front loaded and/or future revenues are subject to considerable degrees of uncertainty. In relation to stocks, I have a theory, using projections to calculate a present value per share is far less useful for a share buying decision, than using those same projections for calculating future value per share for determining potential exit value and rate of return.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. I do not recommend that anyone act upon any investment information without first consulting an investment advisor and/or a tax advisor as to the suitability of such investments for their specific situation. Neither information nor any opinion expressed in this article constitutes a solicitation, an offer, or a recommendation to buy, sell, or dispose of any investment, or to provide any investment advice or service. An opinion in this article can change at any time without notice.

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