Sonos IPO Optimists Need a Reality Check

Sonos IPO - Sonos IPO Optimists Need a Reality Check

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Everything on the surface level indicates that the upcoming initial public offering for smart-speaker manufacturer Sonos will be incredibly profitable. Among consumer-electronic businesses, smart speakers have proven popular around the world, and experts predict increased sales opportunities. But will industry strength alone propel the Sonos IPO as a viable, longer-term investment?

Optimists believe that to be the case, and I can’t fault their logic. According to leading music resource, smart-speaker sales more than tripled last year. In actual numbers, this translates to nearly 25 million units finding homes, with 11 million of those ringing up cash registers in the holiday quarter.

Another astonishing statistic — and one that bodes well for the Sonos IPO — is that 39 million Americans own a smart speaker, according to TechCrunch. Given the platform’s enviable momentum, and that the article was published at the beginning of this year, that figure has likely risen substantially higher.

One particularly encouraging note for smart-speaker companies is that customers responded positively to marketing efforts during the last holiday season. For instance, Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) sharply reduced their entry-level unit prices to boost market share. They likely ran promotions at a net-loss per unit, but management would argue that the initial pain is worth it.

Why? Very simply, consumers love smart speakers. The prior holiday season drove 7% of Americans to buy at least one smart speaker, with 4% being first-timers. I want to emphasize that we’re talking about 7% of all Americans, not a demographic subcategory. It’s no wonder that so many bulls are loving the Sonos IPO.

And with consumers increasingly adopting a connected-home ecosystem, smart speakers are a sure thing. Still, investors must be careful to avoid conflating this trend with a successful Sonos IPO.

Sonos IPO Suffers From Extensive Vulnerabilities

An overriding bearish factor that prevents me from openly embracing the Sonos IPO is fierce competition. Yes, the industry is robust, and will only grow larger. But that doesn’t mean Amazon, Google and the always competitive Apple (NASDAQ:AAPL) will rollout the red carpet for Sonos. No, they’ll claw each other to the death for every inch of market share.

While Sonos bulls may counter that mere competition alone isn’t a dissuading factor, that’s not what I’m necessarily worried about. Instead, it’s the type of competition. As I mentioned earlier, the major players are willing to risk being unprofitable now for a greater share of the pie later. That works if you’re an Amazon or a Google. Both companies delivered robust earnings in the past three years.

Sonos? Not so much. contributor Lauren Goode wrote “Sonos has never posted an annual profit, a fact that tops its risk factors.” I’ll just add and clarify that the red ink isn’t the risky part; it’s that the company will have to dive further into red ink to stay price competitive.

Nor can management rely upon a better product experience. Sonos unfortunately relies upon its corporate partners to provide services such as digital assistants. But as Goode argues, these partners are also rivals, rivals which, like Amazon, “can disable Alexa on Sonos devices anytime.”

Another big problem is smart-speaker consumer behavior. The second-most common use of these devices among American and European customers is playing music or streaming videos. That initially suits the Sonos IPO because the company offers extensive music and podcast services. But Sonos doesn’t control these services, making them vulnerable to competitor whims.

In my opinion, most investors will assess these risk factors and determine that they’re too much to overcome.

Are There Positives for the Sonos IPO?

While I’m definitely going to sit out on the Sonos IPO, it’s not devoid of positives. One source of optimism is again consumer behavior. Overwhelmingly, customers use smart speakers for information-seeking purposes; that is, looking up breaking news, weather reports, life advice and for whatever it is that people browse the internet.

These activities don’t require special licensing rights. Neither do other popular smart-speaker uses, such as controlling other connected devices, or booking an Uber ride. Furthermore, Sonos could develop its own digital-assistant platform, and wean off its competitor dependency.

But ultimately, the competitive environment is a tall order. As I mentioned last month, mighty Apple met trouble trying to break into this sector. The market is price-sensitive and saturated, and that’s not going to change for Sonos.

The fact is that the smart-speaker battle is a lopsided, two-way race between undisputed king Amazon, and second-place Google. Sonos could slot into third place, but would that even be considered a victory?

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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