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Bull of the Day: Sonos (SONO)

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  • SONO

Sonos (SONO) is a Zacks Rank #1 (Strong Buy) that designs, develops, manufactures, and sells multi-room audio products. It offers charging cradles, music players, alternating current adapters, controllers, wireless speakers and loudspeakers.

About the Company

Sonos offers its products through approximately 10,000 third-party retail stores, including custom installers of home audio systems; and e-commerce retailers, as well as through its website.

The company has over 1,400 full time employees and is headquartered in Santa Barbara, California. Sonos used to be known as Rincon Audio, which was founded in 2002.

Sonos has a market cap of $5 Billion and has Zacks Style Scores of “A” in Growth, but “F” in Value. The stock has a Forward PE is 36 and value is a concern for some investors.

Q2 Earnings

Last week Sonos reported a monster 258% beat and raised guidance. The company was expected to see a loss of 17 cents, but instead saw a 27-cent gain. They raised FY21 guidance and now see revenues at $1.70-1.71B v the 1.66B expected. EBITDA was lifted to $270-280M from the prior $225-250M. Margins also are seen higher, going to 15.9-16.4% from the prior 13.8-14.9%.

Management was positive on the call, with the CEO saying:

“Long-term, we remain focused on our key three strategic initiatives - the expansion of our brand, the expansion of our offerings, and driving operational excellence. The powerful momentum we are experiencing in our business, exceeding even our own expectations from six months ago, puts us ahead of schedule on reaching our fiscal 2024 financial targets.”

The beat was the company’s fifth straight and since that streak has begun, the stock is up over 150%.

Sonos, Inc. Price and EPS Surprise

Sonos, Inc. Price and EPS Surprise
Sonos, Inc. Price and EPS Surprise

Sonos, Inc. price-eps-surprise | Sonos, Inc. Quote


Over the last 7 days, estimates have turned higher. For next quarter, we have seen estimates raised by 5%, from $0.0.86 to $90. For the current year, we have seen a surge of 30% move higher in that same time frame.

In addition to estimates, some analysts have taken their price targets higher since earnings. Both Jefferies and Morgan Stanley raised their ratings and targets to $50 or greater. Those targets are over 25% higher from current levels.

Patent Win vs Google

A few days after earnings, Sonos bulls scored another win after an ITC judge ruled Google infringed on five Sonos patents. This ruling is subject to appeal, but this is great news for investors if it is upheld.

If the appeal and countersuit from Google fails, we could see a ban on imports such as Nest and other streaming speakers. This would hit Google’s hardware and open up some market share to Sonos. It would also make then company a potential acquisition target it a settlement wasn’t reached.

This story has just started, so investors should watch out for future headlines on the issue.

The Technicals

The stock struggled for the first couple years after its IPO. However, things turned around late last year as the stock broke $20 and then made all-time highs. Since the beginning of the year, the stock is up about 60%.

SONO failed to eclipse the all-time highs set in April after the earnings and patent news. The stock has since pulled back and investors should watch some key support levels.

The mid-$36 area is the 61.8% retracement from July lows to recent highs. The 21 and 50-day moving averages both line up at $34.50, while the 200-day is just above $32. Watch these levels for support, before blindly jumping in.

Bottom Line

Earnings momentum looks great, but investors are worried about the valuation side of this trade. If the company continues to perform over the last year, they should be able to grow into that valuation.

When you add in the patent win, it could create an extra tailwind for the stock if any appeal doesn’t stick for Google.

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