Sonos: Update of Q2 2022

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Sonos Inc designs, develops, manufactures, and sells audio products and services. It distributes its products in over 50 countries.

Last May 11th, it presented its results for its second quarter of 2022 (which ended on April 2nd; the start of its fiscal year is at the end of September). They disclose an increase in revenue of more than 20% year-over-year and a bit of tension in the margins due mainly to the rise in the price of some components. The growth was driven by solid demand for their products and supply availability during this quarter. But even though they still have ended the quarter with a backlog pending to fulfill.

COVID-19 is still delaying the availability of products, which can be holding up additional sales. Moreover, it is causing an increase in component, shipping, and logistics costs, as well as longer lead times (due mainly to new lockdowns in China). The pandemic has also delayed their planned move to Malaysia to diversify the supply chain.

The conflict between Russia and Ukraine has caused further disruptions, but it didn’t have a material impact on their supply chain.

Sonos speakers revenue represented 79.5% of total revenue. It grew 18.8% year over year, driven by the introduction of Roam in April 2021.

Talking about capital allocation, they have repurchased shares for a value of $74.5 million for the first half of the year.

Call

In the call commenting on these results, Patrick Spence, CEO of Sonos, made the following remarks:

  • The 20% year-over-year revenue growth is even more impressive if we consider that it is being compared with a 90% year-over-year growth last year and was constrained by supply.
  • He announced three innovations.
    • Ray: the new compact soundbar with new acoustic innovations that deliver balanced sound, crisp dialogue, and solid base
    • Sonos voice control: the first voice experience purpose-built for listening and controlling your music on Sonos
    • Sonos Roam: the ultra-portable smart speaker
  • They confirm that the demand for their products is strong regarding the macro environment. And it was even before the stimulus last year.

Outlook

  • They reconfirm their revenue guidance of $1.95-$2 billion for 2022 (continued 20-27% growth during the second half of the year). Based on three reasons:
    • Consumer demand signals from Q2 (offset by supply constraints)
    • Strong new product introductions
    • Pricing actions taken last September
  • Lower gross margin due to the increase in costs: 45.5-46% for the remainder of the year
  • Adjusted EBITDA in the range $290-$310 million (-2.5%)
    • Adjusted EBITDA margin in the range of 14.9-15.5%.

My takeaway

  • Currently, Sonos has 11.73% in short interest.
    • I don’t think these shorts expectations are specific to this company. Most public companies in the US discretionary consumer sector are bearing short positions.
  • It seems probable that there will be some decrease in the demand. The big question is if the market is already discounting it or if it will be more than what is discounted.

Is Sonos undervalued?

Challenging to know in the short term, but based on its long-term goals for 2024:

FY2024 Financial Targets  -$2.5B  Gross Margin  45-47%  Adjusted EBITDA Margin  15-18%

They would get an EBITDA of $412.5 million. With a conservative multiple of 10 (given the potential growth of this company), we would get an Enterprise Value of $4,125 million.

If we add the estimated net cash by analysts for that year ($1,170 million), we get an estimated value of $5,295 million. Which, divided by the number of diluted shares (139.64), gives us a share target price of $37.9.

From the current price of $19.97, this would give us a potential gain of 89.8% in two years.

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