Sonos: Another Killer IPO?

Written by Bill Leebens

For the last few years, investors have been somewhat cautious regarding new  IPOs (Initial Public Offerings of shares, as companies move from privately-held to publicly-traded). So far during 2018, however, a string of widely-hyped tech-y IPOs have seen post-IPO share prices go up in levels ranging from “a nice return” to “Holy Crap!” The skepticism regarding IPOs may be dissipating in the tech sector. As is true of almost everything: it’s cyclical.

As we reported recently  in Industry News, during the dotcom bubble countless companies that had never been in the black, went public—and when the bubble burst, many of those companies went away and investors lost billions. Skepticism prevailed for years, but now—we’re back there, with many analysts feeling most major stocks are grossly over-valued, and debt-laden mega-deals—think AT&T—are back, despite the recent failure of debt-heavy Toys ‘R’ Us and  major problems at Gibson.  Perhaps the phenomenal growth of Amazon in recent years  has made companies once again receptive to looking at companies that have never turned a profit—as was the case with Amazon for many years.

Which brings us to Spotify. While its growth has been impressive (over 160 million users at last count), it had accumulated $1.5 billion in debt before its IPO in April. The initial launch was not stunning: at opening, shares were offered at $165.90, and closed the first day at $149. At present, shares are hovering around $188 (up 13% from the listing price)  and the company’s capitalization is at an amazing $33 billion–making  founder Daniel Ek worth about $5 billion. Not bad for a company whose debt grows right along with its growth in users.

Dropbox is ubiquitous in business these days, and its IPO in March opened with shares offered at $21—making the company’s market cap $8.2 billion. A mere four months later shares are around $32—an impressive 52% growth. The company’s cap has accordingly grown to over $13 billion.

Docusign, also ubiquitous in business, was another April IPO like Spotify. Starting at $29, shares closed at $37 at the end of the first day of trading. Since then, shares have reached nearly $67, and presently hover around $55—an impressive 89% growth. Market capitalization is $8.7 billion.

Will Sonos be as successful? We recently  reported some skepticism on their proposed IPO in Industry News; in recent years the company has reported sizable losses. The company’s S1 filing with the Securities & Exchange Commission showed losses of almost $69 million in Fiscal Year 2015, over $38 million in FY ’16, and a mere $14 million in FY ’17, on revenue of almost $1 billion. In the 6 months since the end of FY ’17, things have improved: $13 million in profits on $655 million in revenue.

The lengthy “Risk Factors” section of the S1 includes a couple facts that are very troubling to this paranoid soul: all of the company’s products are built by a single contract manufacturer, and the Alexa voice-control technology utilized in Sonos products, developed and owned  by Sonos competitor Amazon, can basically be withheld from Sonos at any time—or, in the legal-speak of the S1, “These technology partners may cease doing business with us or disable the technology they provide our products for a variety of reasons, including to promote their products over our own. If these partners disable the integration of their technology into our products, demand for our products may decrease and our sales may be harmed.” Uh huh. Ya THINK??

Presumably, the company will put at least some of their 246 software developers to work developing proprietary voice-control software.

If you have never waded through an S1 filing, they contain a remarkable amount of information on the business, and often provide facts that won’t be found anywhere else. Sonos’ 180-or-so page filing is far from huge, as such things go—the company is, after all, still under a billion a year….

It’ll be interesting to see how the offering goes—and to see how the company looks a year from now.

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