Sonos Offering Shows Investor Skepticism for Consumer Tech

(Bloomberg) -- Selling consumers on cool tech gear is proving to be easier than convincing investors.

With its muted initial public offering, Sonos Inc. is the one learning the lesson this time. While the wireless speaker maker climbed more than 20 percent above its IPO price in its trading debut Thursday, shares stayed within the range at which they'd been marketed by the company. Typically companies look to price the stock at or above the range and trade up further from there.

Sonos rose 25 percent to $18.70 at 1:07 p.m. in New York after pricing 13.9 million shares on Wednesday at $15 apiece. The stock had been marketed for $17 to $19 a piece. The offering raised a combined $208 million for the company and holders who sold their shares, and gives Sonos a market value of about $1.85 billion.

The recent selloff in technology stocks impacted investor sentiment, Sonos Chief Executive Officer Patrick Spence said in an interview with Bloomberg TV on Thursday. Tech stocks in the S&P 500 Index have fallen about 4 percent in the past week, partly the result of disappointing earnings for Facebook Inc. and others.

Some investors have also had a hard time understanding his company at first, he said. He spent a good amount of time explaining in IPO roadshow meetings why he thought its business model is unique.

"The quick reaction was always, ‘Oh they make these great-sounding, great-looking speakers, so they are a hardware company,'" Spence said. "We did have to spend a lot of time helping investors understand that we are a totally different type of company that builds products that last for a long period of time and people come back and buy more of those products."

Standing Out

It's important for the company to try to distance itself from Fitbit Inc. and GoPro Inc. -- two consumer gadget makers whose stocks have suffered. Sonos is off to a lackluster start: Its public market value falls short of the $2.5 billion to $3 billion IPO valuation that, according to people familiar with the matter, the company was targeting in April.

It was a much older company -- a century-old real estate brokerage giant -- that found a bit more favor with investors this week. Cushman & Wakefield Plc priced its IPO within its marketed range to raise $765 million. The stock climbed as much as 7 percent in its New York Stock Exchange debut Thursday.

Sonos's IPO shows there are some key questions on the minds of investors: Will customers upgrade to the latest device even if a product is so sticky that they don't think they need a new model? If they don't, where will growth come from? And how do you head off copycats?

Sonos customers already stream about 70 hours of content a month over its speakers, which use a software platform that is open to major providers including Spotify Technology SA and Apple Music, according to the company's prospectus. The proliferation of music streaming services and voice assistants will be a boon for business, the Santa Barbara, California-based company says.

Being the industry trailblazer didn't guarantee success for GoPro, which is down 75 percent from its 2014 IPO, or for Fitbit, which has fallen 70 percent from its 2015 listing.

Super Competitors

Sonos won't only need to continue out stepping super competitors such as Alphabet Inc.'s Google and Apple Inc., it will also have to basically be the best consumer hardware business operationally in recent history, according to Toni Sacconaghi, an analyst with Sanford C. Bernstein & Co.

“A great product does not always make for a great business,” Sacconaghi wrote in a note to investors on Monday. “Our analysis indicates that over the last 20 years, there have been virtually no historical precedents for consumer hardware companies enjoying significant operating leverage, even during stages of high growth.”

Sonos lost $14.2 million for the year ended Sept. 30 on revenue of $992.5 million, according to its prospectus filed with the U.S. Securities and Exchange Commission. That compares to a loss of $38.2 million on $901.3 million the previous year.

The company said that it may not reach or sustain profitability and expects operating expenses to increase as it increases investment in areas including sales and research and development.

Amazon Ties

The rise of Sonos, founded in 2002, was hit by the launch of Echo, Amazon.com Inc.'s voice-controlled speaker, in late 2014. Months earlier, Sonos executives were telling employees and the public that it would cross $1 billion in revenue for the first time in 2015. The company and has been led by Patrick Spence since January 2017, and its products are now in about 7 million households worldwide.

Now, Sonos says its success depends on growth in the voice-activated speaker market and its ability to gain share. In July, it introduced its first home theater product in the genre, called the Sonos Beam, on the heels of the Sonos One.

For Sonos, Amazon is both a competitor and a supplier for its voice-activated speakers, according to the deal prospectus. The products use Amazon's Alexa system, though its current agreement allows the e-commerce giant to disable its digital assistant's integration with limited notice. Sonos also uses Amazon Web Services, or AWS, to connect its mobile app to servers and other streaming platforms.

Sonos's largest investor is KKR & Co., which planned to hold 22 percent of the company after the offering, according to the filing. Its next largest holders are Index Ventures SA, which expects to hold 12 percent, and Sonos co-founder John MacFarlane, who will have 7.6 percent.

Morgan Stanley, Goldman Sachs Group Inc. and Allen & Co. led the offering. The shares trade on the Nasdaq Global Select Market under the symbol SONO.

To contact the reporter on this story: Alex Barinka in San Francisco at abarinka2@bloomberg.net

To contact the editors responsible for this story: Elizabeth Fournier at efournier5@bloomberg.net, Michael Hytha, Ben Scent

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