You don't get a second chance to make a first impression, and it's safe to say that Sonos (SONO 0.10%) didn't get it right the first time. The maker of high-end wireless speakers has seen its stock plummet 22% over the past four trading days, taking a hit after its first quarterly report as a public company failed to impress the market.
It's been a bumpy first six weeks of trading for Sonos. The stock is 11% above its early August IPO price of $15, but the shares have fallen nearly 30% since peaking on their second day of trading. Last week's earnings report could've been the kind of report that would've catapulted a debutante into the ranks of market darlings, but it didn't live up to the hype.
Image source: Sonos.
Sonic distortion
Revenue fell 7% in Sonos' fiscal third quarter. The decline isn't a surprise. Sonos spelled it out in the prospectus ahead of last month's Wall Street debut. Sonos actually landed at the very top of its preliminary revenue range. It did post a much larger loss than analysts were targeting, but no one is judging the tech-savvy audio system pioneer on its current profitability.
A couple of analysts chimed in with fresh updates to explain the post-earnings sell-off. Brent Thill at Jefferies is telling clients that investors were hoping for Sonos to issue more robust guidance. It's calling for 14% to 16% top-line growth in the current quarter, in line with Wall Street expectations. He sees the stock meandering until the market gets greater clarity on how new products will shape its near-term future. He has a hold rating and a $23 price target.
Katy Huberty at Morgan Stanley also blamed the sell-off on the uninspiring outlook for the fiscal fourth quarter. She's waiting until the market gets its first impression of how consumers embrace the company's new products during the seasonally potent holiday shopping season. She has a neutral equal weight rating and a lower $20 price target.
Thill and Huberty having lukewarm ratings on the stock matters. Jefferies and Morgan Stanley were two of the underwriters tasked to take Sonos public last month.
The good news is that Sonos isn't broken. The fiscal third quarter's decline was a fluke, as the release of the big-ticket PLAYBASE -- its first entry in the home theater sound base niche with a $699 price point -- inflated reported revenue a year earlier. Sonos actually sold 11% more devices during this quarter than it did a year earlier. It just had to settle for lower price points given the product mix.
Growing its installed base of users should be enough. Sonos is competing against the tech giants putting out heavily subsidized voice-activated digital assistants that double as entry-level home audio systems. The company is in a tough spot, but last month's public debut finds it flush with IPO cash to keep innovating until it raises the bar. The current quarter's return to double-digit growth should appease investors, and if that doesn't do the trick, it probably won't be long before Sonos is floated as an acquisition candidate for a tech giant seeing the value in nabbing a high-end brand in this growing market. Sonos had a rough run last week, but things should get better from here.
