Several companies that were able to make being stuck at home a little less miserable fared well in 2020 and 2021. Home audio equipment maker Sonos (SONO -0.93%) was one such beneficiary.
But let's accept another important fact: Some stocks (including Sonos) raced much higher than they should have specifically because of the pandemic, paying the price for these overzealous rallies once 2022 rolled around. As of the latest look, Sonos shares are sitting 64% below their mid-2021 peak, and are still within easy reach of a new 52-week low. The sheer scope of the selling has prompted some investors to write the company off as a potential future investment.
Big mistake. See, there's yet-another third truth investors should be willing to embrace: This stock's steep sell-off is just as overdone as its pandemic-prompted gain was, leaving it ripe for a bullish reversal.
The company's backstory is certainly good enough to make that happen sooner or later anyway. And it's likely to make it happen sooner than later.
Take a step back and look at Sonos' bigger picture
As noted, Sonos makes audio equipment. It sells a range of speakers that connect to smartphones, smart-home equipment, and other entertainment devices. But, it also serves consumer-facing businesses that may need a public sound system. It even offers a modest amount of curated music through an app.
Its awakening of sorts at the height of the pandemic makes sense. So does its contraction in the meantime. People aren't spending as much time at home now that they were back in 2020 and 2021. And, many consumers who purchased Sonos hardware then aren't quite ready to buy again now.
Last quarter's earnings results say as much. Sales fell nearly 24% year over year.
There's a much bigger tailwind blowing, though. While this year is apt to remain relatively lackluster, the markets for all of Sonos' wares are projected to grow at a brisk clip for several more years.
Take smart speakers as an example. Acumen Research and Consulting believes the worldwide smart speaker market is set to grow at an annualized pace of 19.4% through 2028, when it will be a business worth $29 billion per year. That projection jibes with outlooks from Emergen Research and Imarc.
And the numbers are just as impressive when you zoom out to consider the entirety of the speaker market, so it includes stereo speakers, portable Bluetooth speakers, and television sound enhancement speakers. Mordor Intelligence says the wireless speaker market is set to grow an average of 13.5% per year through 2028. Coherent Market Insights' number is 12.8%. Allied Market Research puts the expected annual growth rate at 30.5%. This growth is being fueled by the still-nascent advent of smart home technologies and the recent proliferation of Bluetooth/wireless-enabled smartphones.
These outlooks are all just guesses, of course, and as such should be taken with a grain of salt.
These are all qualified, expert opinions based on thorough research, though. The fact that all of these guesses are in agreement that some degree of major growth is in the cards is telling in and of itself. Underscoring this idea is the fact the analyst community agrees Sonos' revenue growth should begin reaccelerating next year, with earnings growth expected to outpace sales growth through 2027.
Data source: StockAnalysis.com. Chart by author.
That rapid profit growth outlook is plenty plausible, too.
See, the missing ingredient here so far has been scale. Prior to 2020, there just wasn't much of it. Sonos had to crank up production capacity in a hurry, and do so less cost effectively than it otherwise might have liked. That's why the company feels it can safely cull on the order of $50 million in expenses this fiscal year alone -- now that it has time to think things through.
These are cost cuts that should remain in place (relatively) even once sales growth ramps up again beginning next year. It still won't be enough to let the company match 2021's heroic bottom line, but it will put it on track to do so by 2026.
Don't sweat Sonos stock's steep valuation too much
Sonos' shares are still relatively expensive, priced at more than 50 times next year's expected earnings. In most regards, it's still burning off its incredibly frothy valuation created in the midst of the pandemic, when valuation rules were cast aside, displaced by compelling stories.
Don't sweat the valuation too much, though. There's significant growth in the cards here beyond this year. The stock's big sell-off since the middle of 2021 is arguably overdone as well, bolstering the growth-based bullish case.
Maybe this will convince you: While Sonos stock isn't widely followed by the analyst community, of the six that do follow it, it's collectively considered a buy, with an average target price of $22.12. That's 38% above the stock's present price near $16.
Indeed, even the lowest of these price targets is $19 per share, according to numbers from the Wall Street Journal. This implies a 19% upside even under the least bullish of all the bullish arguments.
