The Sonos IPO – Can the Medium Fish Get Big?
Sonos (NASDAQ:SONO) is an interesting company. As many will be aware, yesterday the company went public and it finished the day with a healthy and respectable 30% upside on the IPO placing price ($16), finishing at $20.95. By many metrics, it’s relatively sizeable including its market cap which is about a billion dollars, revenue in its last fiscal year of also nearly a billion dollars and some quarters of profitability although it also regularly loses money.
Despite all this, it is with a degree of trepidation that I write this piece as in the past I have had quite high end audio equipment and still consider myself something of an armchair audiophile, even if my glory days of Meridian home theatre systems have long given way to the realities of parenthood. I’ve tried Sonos equipment (nothing too extravagant, just a Sonos Play 1) and it’s not bad but it also didn’t strike me as particularly game-changing. My wife is quite into gadgets so I figured she’d enjoy it but again, it didn’t really get a lot of use so that speaker got given to my dad and I believe it doesn’t really get much use at his house either.
Guess what we have in our house now? You got it, an Amazon (NASDAQ:AMZN) Echo and therein lies my problem with the Sonos value proposition as an investment opportunity. Undoubtedly, it is a company setup by audio people to make an accessible and easy to use system with reasonably good sound quality (and to be clear, the audio world is famous for its lack of easy to use, high end systems), but it feels like it’s slightly missed a trick.
Smart speakers are an absolutely important business line but there are two fundamental different kinds of smart speaker. The first category (which Sonos falls into) aim to make multi-room (one of the traditional bugbears of mid to high end audio systems) easy, wireless and intuitive. In this category, Sonos clearly excels and is the market leader. The second category however is probably the real direction the market is heading in and that is the trend towards speakers with native assistants provided by the speaker creator, namely Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOGL).
The bottom line is that many market share reports on the smart speaker market simply don’t even consider Sonos and look at the big traditional players. Voicebot has an analysis on market share including Sonos and Amazon unsurprisingly comes in first at almost 62% with Google taking 27% and Apple on 4%. Sonos came in at a paltry 3.8% which is probably decent considering the size of the market but also less than ideal considering that a few years ago, they probably were almost the entirety of the market for smart speakers prior to the Echo being introduced.
Sonos – Dependencies
One of the interesting pieces of the Sonos IPO filing (here) talks about the risk of its dependencies on others. Voice enabled capabilities of Sonos are in part provided in conjunction with Amazon using the Alexa technology which of course Amazon may decide to stop Sonos using in the future. The filing points this out and the fact that Amazon of course is a direct competitor which makes its own smart speakers.
The good news is that Sonos has managed to cultivate a decent ecosystem around its physical devices and its website advertises 58 streaming services its system works with including the big ones you’d expect like Apple Music, Spotify (NYSE:SPOT), Amazon Music and Google Play Music. Sonos maintains that it wants to remain independent and true to its vision of providing music in every room of every home. To a certain extent that will reassure partners like Amazon that it isn’t looking to compete directly on the digital assistant front (realistically, how could it hope to catch up with the big three in this space anyway), but one has to imagine that if Sonos were ever to become a real threat to Amazon’s Echo strategy, Bezos’ firm would rethink letting Sonos use its technology.
It’s interesting to note that Sonos has quite prominently on its website the integration capabilities with Alexa and seems to push it as a complimentary product rather than a direct competitor, touting that existing Alexa devices work directly with Sonos hardware. One wonders whether that is a condition of its partnership with Sonos as the IPO filing directly cites Amazon as a competitor but the public facing website is all about integration with Amazon.
So what we have here is a company with a decent offering but which the world seems to be slightly underwhelmed by. Hardware is expensive and Sonos’ revenue base is of course entirely dependent on hardware sales as things stand today. Its products are good but there are many better if you’re seriously into audio quality, similarly, there are lower audio quality products but with direct integration and “good enough” audio capability in the form of smart home speakers from the big 3 players in the market.
An IPO gives the firm some money to play with and invest in more hardware but one wonders whether it’s a business model which will make it any significant market share inroads to the big 3. If Sonos continues on its current path it will likely continue to do reasonably well but at the same time is unlikely to set the financial world on fire with its returns.
The other important thing to note is that the IPO filing does incorporate some warnings about trade wars and tariffs between the US and China. Certainly Sonos has some of its hardware manufactured in China, so although it hasn’t been hit yet, if tensions and tariffs escalate, it may be affected.