Over the last six months, Sonos’s shares have sunk to $14.05, producing a disappointing 7.2% loss - a stark contrast to the S&P 500’s 3% gain. This might have investors contemplating their next move.
Is there a buying opportunity in Sonos, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Sonos Will Underperform?
Even though the stock has become cheaper, we don't have much confidence in Sonos. Here are three reasons there are better opportunities than SONO and a stock we'd rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Sonos struggled to consistently increase demand as its $1.44 billion of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and signals it’s a low quality business.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Sonos has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 4.5%, below what we’d expect for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Sonos’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Sonos doesn’t pass our quality test. After the recent drawdown, the stock trades at $14.05 per share (or a forward price-to-sales ratio of 1.2×). The market typically values companies like Sonos based on their anticipated profits for the next 12 months, but there aren’t enough published estimates to arrive at a reliable number. You should avoid this stock for now - better opportunities lie elsewhere. Let us point you toward one of our top digital advertising picks.
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