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Sonos: Buy The Dip

Oct. 05, 2021 1:46 PM ETSonos, Inc. (SONO)26 Comments
Gary Alexander profile picture
Gary Alexander


  • Shares of Sonos, the premium speaker maker, have fallen nearly 30% since a near-term August peak.
  • The company is still experiencing substantial revenue growth north of 50% y/y.
  • At the same time, gross margins and adjusted EBITDA margins are also rapidly scaling.
  • A near-term 10% price increase may help to further expand the company's margins and better protect the company against supply-chain woes.
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Sonos sound system isolated

Lukasz Kochanek/iStock Editorial via Getty Images

One of the best parts about broad market corrections, for investors who have a good chunk of their portfolios allocated to cash and bonds and can take advantage of dips, is the fact that the

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This article was written by

Gary Alexander profile picture
With combined experience of covering technology companies on Wall Street and working in Silicon Valley, and serving as an outside adviser to several seed-round startups, Gary Alexander has exposure to many of the themes shaping the industry today. He has been a regular contributor on Seeking Alpha since 2017. He has been quoted in many web publications and his articles are syndicated to company pages in popular trading apps like Robinhood.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SONO either through stock ownership, options, or other derivatives. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (26)

RD2001 profile picture
Anyone here actually own their speakers?

What abt competition....bose, HK, etc
@RD2001 Yes! I bought my 1st speaker about 4 years ago and now own over 20 of their products (outdoor/indoor) and built various systems throughout the house. I have followed the company since their early days as a private company. They were way ahead of Bose (which I also owned) and HK in terms of sound and technology. Hope this helps.
@RD2001 theyre like a puzzle you can just build on as you grow or need more music items...whats interesting, their technology makes music or sound better by way they sparse it out when u combine speakers, plus the ease of multiroom. and they have a special sound. its the future of accessible luxury in sound. the apple of sound. certainly not the top of top but the top that can be reached by a lot. Bose would be their biggest competitor i guess. but thus far being successful penetrating only 12m households....they simmer and perfect and the sky is limit.
Great article on SONO in barrons this weekend. Bears will be crushed once again!!

Although their sound bars are good they don’t have more than one HDMI inputs and reviews of their products doesn’t live up to the hype all the time for a premium sound bar due to their software connectivity which applies to practically to all other brands.
Turk Malloy profile picture
I own the stock ( 5% underwater) and will definitely hold through the supply chain issues ( hoping 6-9 months tops). My Biggest concern is that Sonos will be considered like Peloton - in that it is a premium quality product with high level of features. But in the end - it is a speaker (system) that plays music or TV sound. I don't own a sonos system as have a wired system in house . I bought a soundbar from amazon ( <100) and it sounds fine to me. Anyway point is that after the high end purchasers are exhausted - how many customers will they have ? Even if they are in only 9% of total market - this does not mean the other 91% are looking to buy. This worries me middle and long term.
Britton Bush profile picture
@Turk Malloy I think that’s valid. I’d like to see Sonos expand into the broader and larger Internet of Things IoT market. I believe the IoT market has more TAM and I believe Sono’s discriminator is it’s home network software technology.
@Turk Malloy if you paid attention their "addressable" market its for individuals over $75k income and hh of more than that - the accessible premium market. not poor folks. aspirational for them but theyre paying attention to guys like me and my friends who have built systems in our ever growing homes as lives progress. so yeah, thats a huge opportunity. esp as they introduce new categories or subcategories to their ecosystem - this year, bluetooth portable to add to their home bluetooth. Headphones coming. Car audio just at the tip of that iceberg of opportunity. IP licensing just at tip of iceberg (software or brand co branding like IKEA). Sonos used to scare me at 28 as I thought it was unapproachable, but now at 40...its the standard. and im hooked. they have a solid brand image as well. Supply chain issues currently have peaked so we will see - hopefully - eases in delays more and more --- there are companies far bigger than Sonos that have way more at stake for not doing their best to clear the issues which only helps smaller companies like Sonos. its the best long term buy ever. other note: theyre launching the biggest marketing campaign in its history (I mean they have no debt they should go huge)...a company that barely markets investing in this means theyre confident of the ROI. theyre very shrewd and conservative but ...I think they are thinking very long term and its all going to be a multi bagger whether its 12 -24-60 months. TSLA, FB all these companies waded up and down and were meh then velocity started hurtling upwards....in their own niche world thats still could make this a $20B company in the next 5 years giving a huge return. whether through buyout or its own growth. the sky is limit. just beginning. in short term I have no idea and its frustrating but whatever.
@Goose26 FYI read Barrons article it will help reinforce your long term view. I call this next phase Sonos 2.0. 1st phase was simply proving everyone wrong as the stock moved from low double digits to the mid 40s. Stocks consolidate, people take profits over time, but great companies and mgmt teams continue to execute and this team has proven that to the street. Now is the time to add to your position for the next leg up. Long sono.

13 Oct. 2021
Thank you for a good write-up on a compelling company. We are bullish on the brand, the niche, the TAM, the product assortment and quality, just about everything. We think it is really remarkable that they kept marketing spend flat in $s for 5 years while growing sales 50% during the same time. But IMHO this is an example of great company, lousy stock, of late. I can offer a few thoughts on what may be going on, would love to explore with anyone who is also curious. All of the below are critical considerations for positioning, which is just as important as having a comprehensive fundamental thesis. If you've been in this stock for a month you probably have a pretty different perspective, set of biases, and emotional view than someone who is looking at this with fresh eyes.

Momentum. From 9/3 to 10/11, which was 25 trading days, SONO fell on 21 and rose on 4. It didn't have any back-to-back wins, and obviously no momentum to the upside. Has this changed with consecutive up days off of the 10/11 closing low of $30.19? Volumes during all of these days have been pretty consistent 1.5M to 3M shares.

Technicals. There is technical support around $31.20, where the stock dipped intra-day in May and July. This could be part of what is stabilizing the stock now. Below that I think there is probably downside to ~$29, which the stock gapped through in February after previously hitting as resistance. Something else to consider. RSI indicates it has visited oversold and could be on its way back up.

Shorts. The shorts are covering, but they are still substantial. 8M shares are sold short, which is about 6.5% of the float. That's down from a peak of 9.6M in the first half of September, which was itself a return to the levels seen pre-pandemic (i.e. February 2020). We may have seen the worst of the short pressure and it's something of a consolation to see 1 in 6 shares covered in the recent past.

Earnings. I think we can all agree that supply chain is going to be in focus. The question is not demand, it is how much of that demand can be satisfied, at what costs, and for how long. It's interesting to see that the last 4 earnings results have been met with positive jumps in the stock (although all negative the day before), but with diminishing magnitude - +30%, then +16%, then +7% twice. Good reactions, but less good each time. Worth paying attention to. The stock generally holds these gains one week later, which is a really strong attribute.

Other topics to pay attention to: options (open interest in December and January C35, C40, C45 is massive compared to rest of expiries; earnings are expected 11/18 and monthly options expire 11/19), holders (most large 13Fs are quants / algos like Two Sigma, Renaissance, DE Shaw, rather than steady hands), and initiations (surely there should be more bulge bracket coverage than MS and Jefferies).

I think it is prudent to wade into the stock and figure out the levels at which you would buy more. If you have access to options, this is worth hedging, despite the expense, given the upside, especially if you think the next quarter or two could help to refute or diminish the bear case. There's a lot of time before earnings, which is the only obvious catalyst barring a new product launch.
Google lawsuit. CEO was on CNBC last month and expects more news on the lawsuit around Dec 13th. I was busy working so didn't catch everything but he appeared quite positive. K, supply chain is obviously hard to predict but I picked some up at $31 and $32
Britton Bush profile picture
Great balance sheet. Innovative and sticky products. Would like to see Sonos technology expansion into more ancillary internet of things space to increase their TAM. Their discriminator is their IoT software, not the speakers themselves (IMO). Regardless, I’m bullish.
No mention of the Google patent lawsuit. I think the stock got a little ahead of itself when Sonos won the patent lawsuit which was undoubtedly a catalyst for some investors. Then it sunk in the Sonos is unlikely to collect anything from the lawsuit for quite some time as Google is appealing and not going to just roll over. But at the current price I agree it’s attractive just on the fundamentals without any patent deals.
I’ve been following the price closely since earning and I think something else is up. If makes no sense for it to drop this much even in these market conditions after blowout earnings. Something may be up or it’s just trading irrationally. How do you tell?
@Ziggy60 SONO falls under three categories that are currently out of favor: Pandemic Stay at Home, Technology, Supply Chain. Agree with the Author that this is a buying opportunity.
@Ziggy60 nevertheless another good article Gary. I may start a position today.
One of the reasons I follow you is that you don’t spend time arguing with commenters. You do your thing, and you do it well.
@Ziggy60 I do wish Gary would answer the question about the potential Monetary Value of a Google Settlement.
hulla hoop profile picture
I tend to agree. LT it is one of the top ideas in my universe (1500 stocks).
Supply shortages….sell…..sell…sell…
@apineda7000 based on my checking of their website, only some of their products have between 2-6 week ship by dates...which isnt so bad with a lot of them in stock. i think the supply shortage issue for them is not nearly as bad for the rest of their sector and other industries...
@Goose26 I plan to purchase something on Black Friday……hope your right if not stock heading lower….simply due to supply….Best speakers on market..
@apineda7000 Well, depending on what product you want, id hurry...hehe, I wonder if there will be any Black Friday deals, maybe on the retail side? correlating with this new marketing roll out theyre doing....
Thank you for the article and I agree with all the sentiment. This isnt a speculative stock, its winning and doesnt have debt. What do you think is going on - like why is it not up today with market - and it just feels like something weird is keeping it low. Still, im very long on this but its frustrating.
Great write up. Thanks Gary. Any thoughts on potential for Li’s ending revenue / settlement money from google patent suit?
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