Silver Linings - Sonos

With people spending more and more time at home, the desire to upgrade sound quality of home theatres is more prevalent than ever. CIO Scott Morrison discusses his projection on Sonos, one company to tune into.

Myself and over eleven million other customers use the Sonos proprietary hardware and software platform to listen and stream music, podcasts, conference, movies etc. In a post-Covid world we believe Sonos benefits from some powerful secular trends.

First, we believe that the work from home trend has legs and as workers look to have bigger living spaces, they will need more sound equipment. As well, as more and more of us subscribe to streaming services from Disney, Netflix, Spotify etc. we will look to mimic the sound quality that we are used to from cinemas. I first visited Sonos’ headquarters in Santa Barbara, California after they went public in 2018. I was very impressed with the management team and the high-tech Sonos R&D labs they toured me through that clearly demonstrated they are committed to technological innovation and adding higher margin capabilities.

Sonos plans on launching two new products a year to help drive further growth in there over 30 million product installed base. In fiscal 2020 over 40% of sales from existing customers which will likely be a willing buyer base of new products. And over time more and more sales will come from direct their direct consumer distribution channel which adds to their proprietary customer data. 5% of Sonos revenue comes from licensing, but we anticipate that this can become a larger portion of sales and profits over time as they monetize royalties from their patent portfolio.

Although Sonos faces risks of economic slowdown, competition, supply chain disruptions, conflicts with distribution partners, M&A slip, warranties, taxes, patent disputes, personnel losses, and partner disputes, it has net cash in excess of $600 million, over a 9% free cash flow yield, with a growing back log and earnings multiple in the low teens of next year’s earnings after cash is backed out.