Audio products manufacturer Sonos (SONO) has been in the spotlight due to several major setbacks. A failed app launch in May 2024 significantly damaged the brand’s reputation, leading to a 20% drop in market value. This bungled rollout also triggered staff layoffs and led to the recent departure of three key executives – the chief product, commercial, and executive officers. Following an 8.3% decline in annual revenue from last year, despite the launch of its high-end Ace headphones, Sonos is now focused on rebuilding employee morale and customer trust under the leadership of interim CEO Tom Conrad.
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It’s a critical time for Sonos as the company attempts to return to profitability and brand stabilization. Investors might want to hold off until the company can demonstrate some progress in that regard.
Changing of the Guard
Sonos specializes in creating, developing, and selling audio products and services. The company caters to a global audience with a diverse product line that includes wireless, portable, home theater speakers, headphones, components, and accessories.
The company just announced that Patrick Spence has stepped down as CEO of Sonos after a turbulent period following the problematic launch of a new iOS app. The app, which replaced an earlier version and was designed to streamline the user experience, has been plagued by instability and a lack of key features, leading to customer complaints and failed updates.
Spence’s resignation was followed by the departure of Chief Product Officer Maxime Bouvat-Merlin, whose role has been deemed “redundant” by the new interim CEO, Tom Conrad. Amid the executive reshuffle, the product team will report directly to Conrad, with Bouvat-Merlin transitioning to an advisory role to aid in the smooth changeover.
Previously a board member, Conrad has been appointed interim CEO as the company is searching for a permanent successor. Despite the app’s issues, which have caused frustration and led to calls for a return to the previous version, Sonos has continued to introduce new hardware, including the Sonos Sub 4 subwoofer.
Despite a Q4 Revenue Beat, a Lackluster 2024
Sonos reported Q4 revenue of $255.4 million, which exceeded expectations by $6.96 million. GAAP gross margin was 40.3%, while the adjusted EBITDA for Q4 was negative at $22.6 million. Non-GAAP earnings per share (EPS) of -$0.18 aligned with consensus estimates.
However, for Fiscal 2024, revenue reached $1.52 billion, which marked a decline from expectations due to challenges with the company’s app launch. The Americas and APAC regions reported a 4%-7% decline in revenue year-over-year, with EMEA down 17%, impacted mainly by the economic environment. Across sales channels, retail and other revenue decreased by 8%, while DTC dropped by 12%.
GAAP gross margin for the year was 45.4%, a year-over-year improvement of 210 basis points due to reduced component costs and better inventory management.
Following fourth-quarter earnings, SONO’s management has issued guidance for Q1 2025 and expects revenue to be in the range of $480 million to $560 million, reflecting sequential growth of 88% to 119%. This prediction accounts for several variables, including market weaknesses, ongoing app recovery challenges, and efforts to maintain leaner channel inventory. However, new product introductions such as the Arc Ultra and Sub 4 are expected to offset these challenges. Adjusted EBITDA for Q1 is projected to be between $35 million and $79 million.
Shareholders Take a Wild Ride
The stock has been on a wild ride since last Spring, ultimately declining by 16% over the past year. Yet, the company may have turned the corner with a positive Q3, with the shares rebounding roughly 8% over the past three months. That momentum was short-lived, and the CEO’s departure comes amid a 4% decline in the shares over the past month.
The stock trades near the middle of its 52-week price range of $10.23 – $19.76 and shows negative price momentum by trading below most major moving averages. Further, it appears to be fairly valued with a P/S ratio of 1.14x compared to the Consumer Discretionary sector average of 0.95x.
Analysts following the stock have taken a cautious stance on SONO stock. Based on the recent recommendations of three analysts, Sonos is rated a Hold overall. The average price target for SONO stock is $12.67, representing a potential downside of -9.50% from current levels.
SONO in Summary
Sonos has endured a challenging period marked by a problematic app launch, executive departures, and a drop in market value. Despite this, the company is pushing forward under interim CEO Tom Conrad’s leadership, committed to rectifying past failures and restoring employee morale and customer trust. With a diverse product line and new introductions on the horizon, Sonos exhibits growth potential. Even so, investors are encouraged to exercise caution while awaiting clear signs of this turnaround before making firm decisions. As ever, patience can be the key to sound investment choices.
