Wall Street investors are still hot for music technology – at least that was the message Sonos Inc broadcast this week after its stock SONO surged 33% above its IPO price in its market debut.
Shrugging off lacklustre opening trading, the maker of popular, high-end wireless and voice recognition speakers, closed out the day at over $19 a share on Thursday, giving the 16-year-old Californian company an implied market value of $1.95bn .
If it holds, Sonos flotation could end a curse that’s been hanging over commodity technology since companies like Fitbit and GoPro surged at IPO and then crashed. What makes Sonos different, company executives argued last week, is that unlike, say, smartphones and headphones, their speakers aren’t locked into updating cycles.
“People are used to buying commodity tech that needs to be replaced, but we’re differentiated because our product persists,” Mike Groeninger, Sonos’ vice president of finance, told Marketwatch.
With Sonos, the argument goes, consumers perceive brand loyalty because the Sonos systems are of high quality and will simply add to existing systems when they move or add music-streaming to new areas of the homes.
Sonos backs up that argument with data showing that said 27% of Sonos households own four or more products, and more than 61% of its households have registered more than one device.
Where Sonos products need to be replaced, Groeninger continued, it’s because its hardware can’t support advances in streaming technology. “We’re not forcing obsolescence,” he pointed out.
But if that were all true, and Sonos was uniquely blessed with longterm customer loyalty, then stock analysts could reasonably expect Sonos’ first day numbers to come in more robustly.
One potential problem is that Sonos’ greatest asset in partnering with streaming services Amazon, Apple, Google and Spotify is also its most glaring consumer tech weakness: those companies could decide to move into the hardware business.
Jordan Hiscott, chief trader at Ayondo markets, commented that despite Sonos’ opening day performance his main concern is that Sonos will experience a negative share price performance similar to Fitbit.
“Fitbit is another well-run company with popular products, yet its future profitability can be heavily affected when tech conglomerates, like Apple or Google, decide to produce and manufacture similar, niche devices themselves, which consequently undermines market share.”
The company’s vulnerability to Amazon, for instance, was revealed earlier this month when it was revealed in an SEC filing that the e-shopping giant could disable its Alexa voice recognition technology on Sonos’ speakers on “limited notice”.
In its filing, Sonos also acknowledged that not only could Amazon disable Alexa integration but “Amazon could also begin charging us for this integration which would harm our operating results”.
“In the filing, we’ve just been very upfront about the fact that we could turn off people’s service, they could turn them off. We’re transparent by nature, so that’s in there,” Sonos CEO Patrick Spence told CNBC on Thursday.
Morgan Stanley recently estimated that more than 70% of US households will own a smart speaker with voice commerce capabilities by 2022 and half of all web searches will be voice activated.
The category will become so important to the data tech giants, the report recommended, that Google should give away a free Home Mini smart speaker to every US household.
The $3.3bn this would cost Google parent Alphabet to execute would be a “small price to pay” for the opportunity, it added, since the potential to make money off the trend will likely go to Amazon and Google because of their dominance in their voice recognition technologies and smart speaker technology.
For Sonos, then, perhaps the best policy would be to remain on good terms. The company’s sales have been increasing, albeit modestly from a loyal customer base that drove sales to nearly $1bn last year. The company, still based in Santa Barbara, Californi, where it was founded, has posted annual losses in its three most recent fiscal years.