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Now Might be the Time to Take a Closer Look at Sonos

Sonos might be an underrated stock to watch heading into February.

The announcement of the collaboration between IKEA and Sonos, Inc. SONO was greeted as a path toward democratizing smart home technology. Most believe that the launch of this year’s line of smart home Symfonisk speakers will be embedded within Ikea’s furniture products (all of which will be compatible with Ikea’s existing smart lights and blinds as well as Sonos’ own smart speaker).

To be fair, the leaked prototype for Symfonisk was greeted with mild head-scratching as it resembled a wall-mounted speaker. Of course, the final product should be much more sleek and simple in the usual Swedish aesthetic, but most signs point to them being lined into variants of the company’s familiar products.

For Sonos, the launch and reception of the Ikea Symfonisk is going to be an important barometer for where the stock heads this year. And, if the items are well received, SONO could be an undervalued company with a strengthened and diversified product line, which is exactly why the stock tumbled – along with some of the other big names – before the end of the year.

A Diversified Field of Products

Sonos has had a rough entrance into the public markets. The stock has dumped about half its value since its IPO and many analysts love the premium sound experience, but are wary of the aggressive competition that exists in this tech hardware sector. This is a reasonable analysis as Amazon AMZN, Apple AAPL, Google GOOG and Logitech LOGI are names in this consumer technology sector with smart speaker products.

Google has been especially aggressive with a fresh marketing campaign push to put the Google Assistant and its growing home battery of products. Furthermore, there is the lingering downside risk of all markets entering a bear cycle, which has caused some hesitancy for tech across the board.

However, Sonos, which has only been around for 15 years, does have a strong relationship with its existing customer base that can’t be discounted. Data within their S-1 indicates that SONO has brand loyalty amongst its customers and strong product satisfaction.

The company’s data and duplicated information on Statista show Sonos’ customers repeatedly buy more Sonos products. The average customer owns 2.7 speakers per household with only 39 stopping at one speaker.

Here is an excerpt from the S-1:

“As of March 31, 2018, our customers had registered over 19 million products in approximately 6.9 million households worldwide. Acquiring new households is an important driver of our revenue, both in terms of initial purchases as well as creating the foundation for follow-on purchases. As our customers add Sonos to their homes and listen to more music, they typically increase the number of our products in their homes. In fiscal 2017, follow-on purchases represented approximately 38% of new product registrations. As we execute on our product roadmap to address evolving consumer preferences, we believe we can expand the number of products in our customers’ homes.”

On top of this roadmap, Sonos has great margins and the company is not highly geared. For three years running the company has posted nearly 45% in gross margin. With the launch of Ikea’s new line, it is highly unlikely the company can keep this streak alive, but the company’s revenues are highly seasonal. This means that the earnings upcoming with show some of the record sales from the holiday season.

These factors would make SONO look like a nice long-term value play with the caveat being that the tech sector needs to be able to withstand the recent selling pressure.

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