New Stock in an Old Company Could Soar
Many companies begin trading before they are a household name. In fact, many companies will complete an initial public offering before their products are even widely known among consumers. That’s not the case with Sonos, Inc. (Nasdaq: SONO).
The company reports that its products are in seven million homes. And, those homes tend to be early adopters of technology which means they are a potentially profitable market.
Sonos designs, develops, manufactures, and sells multi-room audio products primarily for use in private residences in the United States and internationally. It offers wireless speakers, home theater speakers, and components.
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In early August, the stock began trading and it has been volatile.
Analysts Are Largely Neutral
Market Watch said,” Sonos Inc.’s loyal customer base, premium products, and platform-neutral ecosystem may not be enough to help the company withstand the competitive landscape for smart speakers, some analysts argue.
At least three analysts initiated coverage of Sonos’ stock with hold ratings on Monday, citing competition from Amazon, Apple, Alphabet Inc., and others, as well as the company’s current valuation. Three more analysts started coverage with buy ratings.
One question is whether Sonos can avoid the fate of Fitbit Inc. and GoPro Inc. two hardware companies that have seen their stocks plummet since their hot initial public offerings.”
Market Watch also noted that, “Jefferies analyst Brent Thill, who began coverage with a hold rating and a $23 price target, is concerned about the company’s growth profile. He sees “no high-growth revenue catalyst on the horizon,” though he noted that the company plans to start releasing two new products a year for the first time in an attempt to jolt growth.
Thill also discussed the competitive environment for smart speakers, writing that companies like Google and Amazon can afford to subsidize smart speakers to help their voice assistants gain acceptance. Sonos, on the other hand, focuses on higher-end products.
“While the experience is premium, the higher price point of Sonos’ products makes it a difficult hurdle for consumers in the low-mid tier range (compared to low priced speakers like Amazon’s Echo for $99 or Echo dot for $50),” Thill commented.
Stifel analyst Matthew Sheerin views Sonos’ high-end positioning as a positive, though he still worries about “competition coming from all sides.” Amazon and Google now have more expensive models that are more in line with what Sonos offers, and other audio-focused companies are getting more serious about smart speakers.
“Despite that competition, we still see Sonos with a competitive edge due to its ‘sticky’ relationship with its large and loyal installed base, which should drive refreshes and add-on products; and Sonos’ ‘platform agnostic’ position with regard to third-party streaming services,” Sheerin wrote
Sheerin has a hold rating and $20 price target on the stock.
Morgan Stanley’s Katy Huberty, who began coverage with an equal-weight rating and $20 price target, said that the company’s new product launches will determine whether it avoids the fate of Fitbit and GoPro.
“If new products fail to meet expectations, we think the multiple will contract similar to Fitbit and GoPro after their initial product missteps,” Huberty wrote.
She argued that the stock could trade more in line with shares of Logitech International SA and Garmin Inc. if its new products outperform expectations. That could mean a multiple of about three times revenue, which gives Huberty a $34 “bull case” valuation.
Huberty said she remains sidelined until she sees whether new items like the Beam, a sound bar, can exceed expectations.
Some Bulls Make an Argument
Other analysts were more positive. RBC Capital Markets analyst Amit Daryanani initiated coverage with an outperform rating and a $25 price target, writing of his expectation for double-digit growth over the long run.
The company is at the “unique intersection” of streaming music, Wi-Fi penetration, and voice assistants, all of which are technologies that should see increased usage over the next few years.
Daryanani doubts that the company will become the next Fitbit or GoPro because user engagement trends look strong; nearly half of registered households use the Sonos app daily. “Fitbit and GoPro had a strong initial surge of popularity but that user engagement for the devices likely declined after purchase.”
Goldman Sachs analyst Rod Hall is also bullish on the stock, beginning coverage at buy with a $25 price target.
“We believe Sonos’ increased product cadence will improve customer engagement in reaching beyond the company’s loyal customer base and we expect frequent product launches to help drive more consistent revenue growth,” Hall wrote.
“Sonos also possesses what we see as valuable multiroom music streaming intellectual property that should be monetizeable over time.”
Traders could consider trading with the bulls, and limiting risk, since there is significant potential in the stock for the short term.
Trading the Trend
When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.
Among those strategies is a bull put spread that could be used. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up trend.
Source: The Options Industry Council
This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.
Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long term investors use to generate income in stocks they own that are unlikely to make large moves.
Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.
A Specific Trade for SONO
For SONO, a bull put spread could be opened with the September 21 put options. This trade can be opened by selling the September 21 $22.50 put option for about $3.25 and buying the September 21 $15 put for about $0.20.
This trade would result in a credit of $3.05, or $305 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.
The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $7.50 ($22.50 – $15). This is multiplied by 100 since each contract covers 100 shares.
Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $445 ($750 – $305).
The potential gain is about 68% of the amount of capital risked. This trade will be for about one week and the annualized rate of return provides a significant gain.
The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.
These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.