Need a last-minute gift idea? That doubles as a great investment?
We have you covered.
Today, we’re turning over the Digest to Eric Fry, editor of Fry’s Investment Report.
Eric is InvestorPlace’s global macro specialist. He’s also considered to be one of the greatest stock pickers of all time by many finance industry insiders.
You see, in an industry where an analyst is fortunate to have just one 1,000%-gaining pick to his or her credit, Eric has an astounding 41 such 1,000%+ winners.
In order to have this type of track record, it requires next-level analytical skills. Recently, Eric recommended a company that showcases this type of analysis. I thought it was a great illustration of the thought that goes into one of Eric’s recommendations, so I wanted to share it with the Digest. Eric kindly agreed.
Plus, as mentioned a moment ago, you’re in luck if you’re looking for a last-minute gift idea. I own two products from the company you’ll read about today, and am a very happy customer.
Enough from me — I’ll let Eric take it from here. By the way, Eric released a brand-new recommendation in his Investment Report newsletter yesterday. To read about it, along with Eric’s other potential 10-baggers, just click here.
Sonos Hits a High Note
By Eric Fry
If your household is one of the 9 million that contains a Sonos speaker, you probably understand one major reason to buy the company’s stock: Sonos Inc. (SONO) makes great products.
Sonos doesn’t simply make audio speakers. It literally invented multi-room home audio technology and holds more than 500 patents related to this technology.
This Santa Barbara, California-based company designs, develops, and produces audio products like wireless speakers, charging cradles, and music players. Its wireless speakers can integrate with multiple audio platforms like Apple Music, Spotify, and Pandora, and can operate seamlessly throughout every room in the house.
Sonos products have attracted such a strong following that repeat customers account for a hefty 37% of the company’s sales.
Nevertheless, producing a popular consumer product never guarantees long-term success. Many times, a popular product becomes a flash-in-the-pan fad that flames out after a few years. Or sometimes, hot products succumb to competition.
But Sonos speakers do not seem to be a fad, and the company has successfully thwarted intense competition. The company has consistently innovated and enhanced its product offerings and platform to strengthen its leadership position.
As company CEO Patrick Spence reiterated this week, “The quality of our products across design, ease of use, sound quality, the openness of our platform, and the premium positioning our brand drives growth in purchases by both new and existing customers.”
As a result of its success, the company announced another strong annual performance two days ago.
Specifically, Sonos delivered its third straight year of double-digit revenue growth and third straight year of 20%-plus bottom-line growth. As a result, the company’s free cash flow is trending sharply higher, as is the net cash on its balance sheet.
The company’s strengthening financial performance is the direct result of its marketing success. During the last 12 months, 1.7 million new households purchased at least one Sonos product — bringing the total to 9 million households.
That number illustrates the growing popularity of the Sonos audio platform. But it also provides a glimpse into the company’s massive growth potential.
Less than 7% of U.S. households own a Sonos product. Therefore, the company could double its consumer base by penetrating just 14% of U.S. households. Furthermore, the longer a household remains a Sonos customer, the more products it tends to buy.
During the last 12 months, for example, the average number of registered products per Sonos household increased from 2.8 to 2.9. That increase may not seem very significant, until you realize that every 0.1 increase in this metric equals 900,000 Sonos products!
For perspective, the company sold just over 1 million products during the last three months.
Clearly, the U.S. market alone provides ample opportunity for steady organic growth. And the company hopes to boost that growth rate by continuously introducing new products like the Sonos Move, Sonos One SL, Sonos Port, and Sonos Amp.
But neither organic U.S. market-share growth nor new product introductions would qualify as “game changers” for Sonos. These factors simply provide a long runway of potential growth.
That said, Sonos recently inked a marketing deal with Ikea that could definitely be a game changer.
This partnership started on Aug. 1 when Sonos launched a new product line with Ikea called “Symfonisk.” These speakers resemble household furniture like lamps.
On the very first day of launch, Ikea sold more than 30,000 Symfonisk table lamps and bookshelf speakers — a result that bodes very well for this partnership. CEO Spence said:
In addition, our data suggests that Ikea households are purchasing their next Sonos product in a similar way to traditional Sonos new households. Consistent with our expectation, that once introduced to the simplicity of the Sonos experience, customers will add more products to augment their home sound system … Ikea is going to be a great new household driver. And when you combine that with the fact that we’re seeing that kind of behavior in return repeat purchase, I think we’re in an excellent position. And we’re very pleased with the start that we’re off to with Ikea.
To get a feel for how potent the Ikea partnership could be, consider two comparisons:
1. Sonos currently sells into 9 million households; Ikea sells to 1 billion consumers, representing at least 300 million households.
2. Sonos currently sells into seven countries; Ikea sells into 50 countries. And remember, all of Ikea’s customers are visiting their superstores for one reason: to buy products for their homes!
Sonos has barely achieved “household name” status in the United States … and is virtually unknown elsewhere. But this new Ikea partnership could change all that in a hurry.
Because Ikea will introduce Sonos products to 1 billion consumers in 50 countries, Sonos will receive a windfall of “free” advertising and marketing. In fact, this marketing is even better than free because Sonos will generate sales and profits from it.
One final note worth mentioning …
The rumor mill has been abuzz with a story that Apple Inc. (AAPL) might try to buy Sonos. Certainly, the acquisition would make strategic sense for Apple, and the price tag for the purchase would amount to a rounding error on Apple’s income statement.
Sonos’ current enterprise value is less than $1 billion — or about the amount of free cash flow Apple generates every six days. In other words, money would be no object for Apple.
That said, neither company has responded to the rumor.
But investors can afford to ignore this rumor because a stand-alone Sonos possesses ample potential to deliver outstanding long-term results.
“We’re in the golden age of audio,” Sonos CEO Spence declared two days ago. Accordingly, Sonos is well-positioned to mint some gold for its shareholders.
This is the kind of quality company we find in Fry’s Investment Report. To learn more about joining us, click here.