Sell-Side Largely Neutral On Sonos After Q3 Print

Sonos Inc. SONO reported earnings for the first time since the company’s August IPO Monday, sending the stock down more than 16 percent in after-hours trading. 

The Analyst

• Morgan Stanley analyst Katy Huberty reiterated an Equal-weight rating and $20 price target.
• Jefferies analyst Brent Thill reiterated a Hold rating and $23 price target.
• Goldman Sachs analyst Rod Hall reiterated a Neutral rating and $25 price target.
• Stifel analyst Matthew Sheerin maintained a Hold rating and $20 price target.
• Raymond James analyst Adam Tindle maintained an Outperform rating and $24 price target.

Products

Sonos' quarterly print lacked visibility into Beam sales, which are imperative to stock performance, said Morgan Stanley's Huberty.

“Management noted the new home theater product Beam is tracking to more bullish internal targets, but it’s too early in the product cycle to raise numbers, in our view. Better visibility into Beam sell-through is key to us becoming more constructive, as new products represent 23-25 percent of revenues for the foreseeable future,” the analyst said. 

Products like Beam have the ability to diversify revenue drivers and are key to a sustained expansion, Huberty said. Morgan Stanley remains on the sidelines pending the product’s holiday performance, she said.

Raymond James' Tindle broke down Sonos' revenue by product. 

“Wireless speakers contributed $94 million, or 45 percent, of total revenue for the quarter. Home theater comprised 32 percent of total revenue, or $67 million, while components added $42 million." 

Guidance

Jefferies' Thill said the print held no surprises.

“Sonos' Q3 numbers came in-line, and Q4 guidance was in-line with expectations (but likely not what investors were playing for). Guidance was very tight ($5 million spread on revenue) given only 20 days left in the quarter with good visibility. [The] focus will shift to [2019 first-quarter and full-year 2019] guidance on the [fourth quarter 2018] earnings,” the analyst said. 

Sonos' restructuring program should should alleviate some of the company's operating margin pressure via $14 million in annualized savings, according to Raymond James. 

The restructuring efforts provide a positive step toward achieving operating margin targets of 13-15 percent, said Tindle. 

“We see SONO as a stock in which solid revenue growth, stable gross margin and an improved operating structure should lead to meaningful EBITDA growth, and these tend to be winners,” the analyst said. 

Direct-To-Consumer 

Sonos' direct-to-consumer category continues to take share, said Jefferies' Thill.

"Sonos opened a second distribution center in the U.S. and can now reach 99 percent of orders in three days," the analyst said. "Additional OPEX leverage should come through greater utilization of messaging in-app to consumers to drive repeat purchases per household." 

Goldman Sachs' Hall said the direct-to-consumer channel has increased to 12 percent of overall sales, a 20-percent year-over-year improvement.

Expansion

A Japanese expansion is on track, according to Goldman Sachs' Hall.

“Sonos entered the Japan market in August and remains focused on growing its presence in the country. Management noted that it will take time to generate meaningful revenues (beyond FY19),” Hall said.

As Japan is the second-largest music market in the world, Stifel's Sheerin considers this expansion to be Sonos' next major geographic territory opportunity.

“However, the company expects Japan’s revenue contribution to be minimal over the next several years as it works to establish a brand and local services foothold within this sophisticated market." 

Price Action

Sonos shares were down 18.17 percent at $17.38 at the time of publication Tuesday. 

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Photo courtesy of Sonos.