As the Industry Focus team wraps up its discussion of the upcoming IPO of wireless speaker company Sonos, they bring up an analogous debut from a few years ago to illustrate the potential downside of investing in a pure-play equipment manufacturer.
Click below for our discussion of a fate which Sonos will seek to avoid.
A full transcript follows the video.
This video was recorded on July 10, 2018.
Vincent Shen: There's still a few important aspects to this Sonos story to keep in mind. On one hand, Sonos is arguably the company that many investors have been waiting for if they want clean exposure to the smart speaker market. This really going to be the only pure-play option trading publicly in the near future. It's tough to look at an Apple, an Alphabet, or an Amazon, or even a Samsung or a Sony, in terms of the larger companies having these portfolio brands that you mentioned -- you can't really see those stocks as a play on smart speakers, given how small the contribution is that that business is for these huge, huge companies.
In the end, I also can consider that a curse in that Sonos has this open platform, these partnerships with the hundred streaming content providers that you mentioned. But, the market has generally been unkind to hardware-focused companies in the consumer electronics space, and for good reason. I think it's an unfortunate comparison, but, Asit, what's the cautionary tale that came to mind when you were looking at Sonos? It came to mind for me, too.
Asit Sharma: GoPro. GoPro had a similar profile. Very innovative product. The management of that company tried to sell investors on this prospect, "We'll differentiate into content, and that will keep us from being just a hardware manufacturer." When you look through Sonos' filing, they do have a persuasive argument in that, "Look, we have a lot of patent technology. We pioneered this stuff. Our app is very seamless, and it helps our ecosystem expand." They have a persuasive argument.
But at the end of the day, if the frenemies do decide to compete -- Apple with Siri is yet another competitor that we haven't mentioned. You mentioned Alphabet, Vince. Sonos is also integrating with Siri in its speakers, but Apple has its own product. GoPro is the example that came right up to the surface of both of our minds. We hope this isn't another GoPro.
My final thought is, after reading about Sonos, I really like the way the company's run. I like its innovation. I think, if you are someone whose heart is in this business, you've been waiting for that investment in the pure-play speaker market, as Vince says, then I'd consider buying this. If you're not, then I'm going to give the standard advice that we've given for many IPOs which don't have that huge, tugging, "You have to buy in now," which is: wait, watch this thing over a few quarters. The train won't leave the station immediately. It rarely does in hardware components. You have time to figure out if this company is for you or not. Vince, I'm curious what your thoughts are. Would you buy this next month? Would you wait?
Shen: I'll say, I'll wait just to get the official S-1 prospectus. Once they've shared more details, in terms of, how much proceeds they're raising, what the valuation will be based on the range they provide. There's always that base information that, of course, we'll be looking out for and will update on in a future episode.
Otherwise, at this point, it does worry me. I think the GoPro comparison is apt. Though, maybe I'll call it a hybrid of GoPro and Roku because it's this open, agnostic platform, in terms of the content providers. But, unfortunately, there's no ad business for this to rely on, whereas Roku has been able to leverage that and move away from being branded as purely a hardware play.
That's my take on it. I'm curious, any final other thoughts that you think investors should have before we roll off?
Sharma: Sure, just one last thought. The company is projecting that it will move into other services, hasn't really clarified that. Ultimately, management wants to extend beyond this into other product lines. You can take your imagination into cars, office. I think they did actually mention office as an outlet. There are some peripheral revenue streams that Sonos can tap into. That needs capital, but hey, that's why they're going public. For me, keep an eye on it. It's a very interesting company, very intriguing company.
Shen: It can be tough sometimes, when you have a company where you're maybe not so certain about the business itself, but in terms of my personal experience with products, I quite like them. It's a bit of a tough situation there.
Fools, we will definitely be providing updates for Sonos as they come closer to pricing their IPO, and in the quarters after that, how the business performs.