Rosenblatt initiated coverage on audio equipment manufacturer, Sonos, Inc. (NASDAQ:SONO) with a Buy rating and set their 12-month price target on the stock at $20.00 as analysts believe the company is ready for a return to growth.
“From our standpoint, Sonos is a category leader in a market that should return to growth, driven by the ease and appeal of multi-room music along with the continued adoption of soundbars,” write the analysts.
Sonos primarily focuses on high-end home audio products, which cater to a global market exceeding $20 billion. This market is serviced by specialized installers and more widespread retail outlets. Sonos holds the top position as the most recognized brand for home theater speakers priced above $200 in both the U.S. and EMEA regions.
Additionally, it is the preferred choice among custom installers for wireless audio systems, soundbars, and subwoofers. In contrast to the modest single-digit growth seen in the traditional speaker market, Sonos has consistently expanded its market share, resulting in a compounded revenue growth rate of 15% between FY17 and FY22.
As of the end of FY22, the retail channel accounted for 56% of the company's total revenue, with Best Buy (NYSE:BBY) being the largest customer, contributing 15% of the overall revenue. Last year 21% of revenue came from the professional installer channel, serving as another pivotal component of the company's strategy.
The momentum generated by both the Retail and Installer channels is driving the expansion of the company's Direct To Consumer (DTC) business, which constituted 23% of the revenue in FY22. As the DTC channel continues to grow, Rosenblatt anticipates experiencing positive effects in terms of both gross margins and working capital.
In the company's 3Q, Sonos reported revenue of $373.5 million, surpassing the consensus estimate by 11%. Adjusted EBITDA reached $34.3M, significantly exceeding the consensus projection of $6.9M. This strong performance was supported by an increase in gross margins, which rose to 46.0% from 43.3% in the previous quarter, although it still fell short of the 47.3% recorded in the same period last year.
Following the Q3 results, Sonos adjusted its FY23 revenue guidance. The previous range of $1.625B to $1.675B was narrowed to $1.64B to $1.66B, with a midpoint of $1.65B. This suggests Q4 revenue in the range of $290M to $310M, which represents a 2% to 8% YoY decline. This decrease is attributed to the likelihood that the strong performance in Q3 led to some demand being pulled forward from Q4.
Adjusted EBITDA guidance was also narrowed, moving from a prior range of $138M to $168M to $148M to $158M, with a midpoint of $153M.
Shares of SONO are up 4.21% in mid-day trading on Wednesday.