What happened
Shares of Sonos (SONO -1.69%) cratered this morning after the popular speaker maker reported a big sales miss last night (but an earnings beat) -- and a key executive's resignation. Analysts had predicted Sonos would report $0.07 per share in pro forma profits for its fiscal third quarter and $423.2 million in sales. But while Sonos exceeded the profits prediction with a reported $0.19 per share, its sales came in well below estimates at just $371.8 million.
And now Sonos stock is down 24.8% as of 2:25 p.m. ET.
NASDAQ: SONO
Key Data Points
So what
Analysts had expected Sonos' revenue to rise at least somewhat in Q3, but revenue slipped 2% instead. Adding to the bad news, the company's per-share profit was only of the pro forma variety -- and one-third less pro forma profit than it reported in fiscal Q3 2021. Moreover, when calculated according to generally accepted accounting principles (GAAP), Sonos only broke even for the quarter with a per-share profit of $0.00 -- down from $0.12 a year ago.
And the company's free cash flow was negative.
Sonos blamed "the dollar's appreciation and high inflation" for its poor showing in Q3, saying these factors "adversely affected consumer sentiment globally." Management further warned that these issues will continue to affect its results in the final quarter of this year. Perhaps not wanting to wait around and try to navigate these troubled times, CFO Brittany Bagley has decided to leave the company on Sept. 1. She'll be replaced by current Chief Legal Officer Eddie Lazarus on an interim basis.
Now what
Management is now guiding investors to expect its fiscal 2022 revenue will be no more than $1.76 billion, up only 1% or 2% from last year. That's potentially even worse than the results just reported, which cost Sonos 25% of its market cap.
The good news is that gross profit margins on that revenue are holding up, with management only tightening its projected range to about 45.8%. The bad news is that unless conditions improve in unexpected ways, Sonos is now telling investors to expect these sales and margin trends to persist "beyond FY2024."
So what does that imply for investors? While management didn't say this outright, it does seem that analyst projections for Sonos growing its profits 27% in fiscal 2023 now seem bleak. Low single-digit sales growth and static profit margins simply don't add up to much of a chance of growing bottom-line profits by double digits. Thus, even if Sonos looks reasonably priced at a trailing price-to-earnings (P/E) ratio of 23 today, chances are the valuation isn't quite as good as it looks.
Investors selling Sonos stock today, I fear, are making the correct call.
