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Here's the Real Reason Sonos Stock Got Crushed Today

By Jon Quast – Aug 6, 2020 at 11:46AM

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When investors buy a stock because a prominent analyst says to, there's not enough conviction to keep holding when things get rough.

What happened

Shares of Sonos (SONO 1.30%) are getting crushed on Thursday, after reporting results for its fiscal third quarter of 2020. Revenue was down and the company reported a big net loss. As of 11:30 a.m. EDT, the stock was down 15%.

But I don't believe Sonos' results are the biggest culprit for its tanking stock price today. Rather, a prominent analyst released a bullish report for Sonos on June 22, and the stock had surged around 45% over that short time period. Therefore, it appears many investors simply bought in with little conviction and are now quick to bail. 

SONO Chart

SONO data by YCharts

So what

Citron Research previously published a bullish report on Sonos, believing the company was undervalued. It set a $30 price target on the stock, and even suggested Apple should acquire the company. Investors piled into the stock on the news.

The report pointed to monstrous demand for Sonos products, as people were stuck at home and upgrading audio equipment. But this was only partly true. Sonos confirmed what the report pointed out: Seven of its top products are sold out. But high demand suggests robust revenue growth, and that wasn't the case. Sonos' Q3 revenue decreased 4% year over year to $249 million.

The decrease in revenue is due to brick-and-mortar retail partners being closed. By contrast, Sonos' direct-to-consumer sales surged 299% higher. In theory, these sales should be more profitable. However, the company is working through restructuring costs, tariffs, and an ongoing legal battle. The end result was Sonos' net loss grew from $14 million last year to a whopping $57 million this year.

This isn't how bandwagon investors expected the COVID-19 quarter to play out. Many took to social media to voice their frustration with Citron Research as they now bail from this "easy-money" growth stock.

A frustrated man puts his hand on his head while facing a big, red, down stock chart.

Image source: Getty Images.

Now what

This story is a good reminder of why a long-term view is needed in investing. In my opinion, the report from Citron Research was good and contained many valid points. However, investors were overly fixated on this quarterly report, forgetting that nobody is clairvoyant. Unforeseen factors are sending Sonos stock lower, at least for now.

It's tempting to say the drop in Sonos stock today is an overreaction. After all, if there's demand but products are simply out of stock, then it sets up a nice surge in sales going forward. However, that doesn't appear to be the case. The company is guiding for fourth-quarter revenue of $290 million to $305 million. This is just 1% year-over-year growth at the midpoint.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Sonos Inc. The Motley Fool has a disclosure policy.

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