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Sonos’s Potential IPO A Warning for Investors

Published 05/20/2018, 10:35 PM
Updated 07/09/2023, 06:31 AM

The IPO market has been booming in 2018, with one company after another ringing the bell and watching their share prices skyrocket immediately. But while this boom market is undoubtedly good news for investors and companies like DocuSign Inc (NASDAQ:DOCU) and Dropbox Inc (NASDAQ:DBX), we can inevitably count on less stellar companies going public to take advantage of more gullible investors during these boom times.

Sonos Inc. could very well become one of those IPOs. The Wall Street Journal reported last April that the wireless-speaker company was “preparing for an initial public offering that could come as soon as June or July.” Sonos filed confidentially with the SEC and has not released relevant information to the public yet. But even a cursory glance at the information we do know should concern potential investors, such as the fact that Bloomberg reported that Sonos just laid off 6 percent of its workers ahead of said IPO.

Maybe Sonos can present a plausible case for why investors should consider it when it formally announces its plans to go public. But as of right now, Sonos should serve as a cautionary tale that in this presently hot IPO market, investors will see all sorts of companies go for the sweet IPO money that absolutely do not deserve it.

The Competition Problem

As noted above, Sonos is a wireless-speaker company which lets customers play music from any room in their homes. The Wall Street Journal noted that Sonos last year released its first smart speaker, the $199 Sonos One, powered by Amazon’s Alexa voice assistant. Furthermore, Sonos has plans to integrate its speakers with Google’s and Apple’s voice assistants.

Integration is Sonos’s best chance, because the fundamental problem this company faces is how it intends to compete with Google (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN) in the wireless speaker market. A June 2017 report from Strategy Analytics found that Amazon had surpassed Sonos in market share, and the Apple (NASDAQ:AAPL) Homepod will also be competing directly with Sonos. Sonos must compete with Apple, Google, and Amazon, and it appears to be losing the competition. What is its bold strategy to turn things around?

For now, it appears to be laying off employees. In addition to laying off 6 percent of its workforce recently, Sonos also laid off employees in 2016 to adjust to changes in the music industry. Perhaps the layoffs will improve Sonos’s financial numbers, and the company stated that it was “growing and profitable.”

I have no doubt that Sonos is growing given the continued demand for smart wireless speakers, but I suspect that Sonos may be referring to gross instead of net profit as tech companies going public rarely post a net profit. And it will be easier to make a sounder judgment once we have an idea of how Sonos has been growing, particularly with larger tech companies muscling into its territory.

Furthermore, things could change depending on its valuation. The Wall Street Journal report notes that Sonos would have a market cap of $2.5 to $3 billion, while its revenue is at least $1 billion. A price-to-sales ratio of 2.5 to 3 is smaller than Apple or Amazon, so that could be one good thing going for Sonos. However, investors interested in derivative financial instruments should note that these valuation numbers are far more likely to increase than decrease leading up to the IPO, which would end up nullifying one of Sonos’s few potential advantages.

A Warning Sign

As Sonos has not formally decided to go public, it is possible that nothing at all will happen, or that it seeks a reasonable valuation and becomes a decent investment. But until Sonos releases more information, investors will have to look at those tech titans looming in the distance and see that for now, Sonos appears to have no serious plan to deal with them. Some investors will probably look at a rising tech company and hop on in this booming market. But the potential Sonos IPO should serve as a warning of the classic axiom that bad money follows after good. Keep away from this stock, and look for better companies in this hot IPO market.

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