Sonos: A premium audio business built on an ecosystem

Sonos is a well-known brand in premium home audio, best known for its wireless speakers and multi-room sound systems. From smart speakers and soundbars to portable speakers and headphones, Sonos combines high-quality products with software that connects everything into one easy-to-use system. With a loyal customer base, a focus on building a long-term ecosystem, and recent efforts to improve execution and efficiency, Sonos is aiming to remain relevant in a competitive market. The question remains: Does Sonos deserve a place in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Sonos at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Sonos, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Sonos is a leading sound experience company founded in 2002 and best known for pioneering multi-room wireless audio. Since introducing the world’s first multi-room wireless sound system in 2005, Sonos has built a premium audio platform that connects music, movies, TV sound, podcasts, and voice into a single, cohesive system across the home. The company designs and sells high-end speakers, soundbars, subwoofers, portable speakers, system components, and, as of 2024, over-ear headphones with the launch of Sonos Ace. Its products are designed to work together seamlessly through proprietary software, allowing users to stream audio throughout the home with high fidelity and intuitive control. Sonos sells through direct-to-consumer channels, specialty retailers, and partners such as IKEA and Sonance, while also generating revenue from accessories, licensing, advertising, and subscription services like Sonos Radio HD and Sonos Pro. Sonos’s business model is primarily hardware-driven but reinforced by software and services that improve over time. A defining feature is the way households expand their systems: customers typically start with one product and add more rooms and devices over time, increasing both switching costs and lifetime value. Today, Sonos has more than 17 million households globally and over 53 million registered products, with the average household owning just over three Sonos devices. Nearly half of new product registrations come from existing customers, highlighting strong repeat purchasing behavior. The company’s competitive moat is rooted in its integrated system, brand strength, and software platform. While many competitors sell individual audio products for specific use cases, Sonos’s strategy is to deliver “every dimension of sound” through a single, unified system. This system-centric approach is now the company’s organizing principle and the foundation of its durable advantage. The Sonos platform is independent by design and acts as a neutral layer that connects first- and third-party services, formats, and control methods in one place. At the core of this moat is proprietary software that acts as the connective tissue between devices. The Sonos app, device firmware, and cloud orchestration layer enable synchronized multi-room playback, fast switching between services, and consistent control across apps, voice, and hardware buttons. The platform supports more than 100 streaming services and brings together technologies such as Bluetooth, AirPlay, Spotify Connect, Dolby Atmos, and lossless audio in a way few competitors can replicate. This openness gives users freedom of choice while keeping them anchored inside the Sonos ecosystem. Brand and design further reinforce the moat. Sonos is associated with premium sound quality, elegant industrial design, and ease of use, positioning it clearly above mass-market smart speakers. Its products regularly receive industry recognition, and customer satisfaction remains high, supporting pricing power in the premium segment. The company also holds a substantial patent portfolio in wireless audio, developed over two decades. Finally, scale and ecosystem effects strengthen Sonos’s position. With tens of millions of connected devices already in homes, the platform is an attractive destination for content and technology partners. Each new product, software update, or integration increases the value of the system for existing users, creating a flywheel where a growing installed base leads to more partners, better experiences, and higher customer loyalty.

Management

Thomas “Tom” Conrad serves as the CEO of Sonos, a role he formally assumed in July 2025 after having served as interim CEO since January 2025. He stepped into the position following the resignation of longtime CEO Patrick Spence at a moment when Sonos was facing operational strain, product execution challenges, and a need to restore trust with its core customer base. Tom Conrad brings a rare combination of deep product leadership, technical expertise, and consumer internet experience, making him particularly well suited to lead a system driven hardware and software company like Sonos. Prior to becoming CEO, Tom Conrad had served on the Sonos Board of Directors since 2017, where he was closely involved in strategic decisions during key phases of the company’s development, including its transition to a public company, international expansion, and evolution toward a more software centric platform. This long board tenure meant that when he stepped into the interim CEO role, he already had deep knowledge of Sonos’s culture, technology, and customer base. Before Sonos, Tom Conrad was the CEO of Zero Longevity Science, a consumer health technology company focused on behavior change, wellness, and personalized health insights. Earlier in his career, he spent over a decade at Pandora, where he served as Chief Technology Officer and later Chief Product Officer. At Pandora, Tom Conrad played a central role in shaping the product experience and scaling the platform to tens of millions of users, helping transform Pandora from a niche service into one of the world’s most widely used music streaming platforms and laying critical groundwork ahead of its IPO. His earlier roles at ReplayTV and Berkeley Systems further cemented his reputation as a product leader who could bridge engineering excellence with intuitive user experiences. As interim CEO of Sonos, Tom Conrad led the company through a critical reset following customer backlash related to the 2024 app overhaul. His immediate priorities were stabilizing the software platform, improving execution discipline, and refocusing the organization on what differentiates Sonos. Under his leadership, Sonos reoriented around the Sonos system as its organizing principle, streamlined operations, implemented restructuring efforts to improve efficiency, and recommitted to delivering the premium, reliable experience customers expect. These efforts, combined with visible improvements in software quality and internal processes, ultimately led the board to appoint him as permanent CEO. Tom Conrad holds a degree in Computer Science from the University of Michigan. His leadership style is widely described as transparent, product led, and customer centric, with a strong emphasis on accountability and long term platform thinking. Unlike many consumer electronics executives who come from traditional hardware backgrounds, Tom Conrad’s career has been shaped by software, platforms, and ecosystems, which aligns closely with Sonos’s ambition to be a unified, independent audio platform rather than a collection of standalone devices. As CEO, Tom Conrad is expected to focus on strengthening Sonos’s software foundation, deepening ecosystem value, and restoring consistent innovation across hardware and services. Given his track record in scaling consumer platforms and guiding companies through periods of reinvention, I believe Thomas “Tom” Conrad is well positioned to lead Sonos through its next chapter.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. We do not have ROIC data prior to fiscal 2019 because Sonos completed its IPO in September 2018, making fiscal 2019 the first year with full public financials. Since then, Sonos’s ROIC has been mixed, reflecting both the nature of its business model and an unusually volatile operating environment. At its core, Sonos is a hardware led company with meaningful upfront investment requirements in product development, software, inventory, and manufacturing partnerships. In the early years as a public company, this naturally weighed on returns, which explains the modest ROIC in fiscal 2019 and the negative result in fiscal 2020. The sharp improvement in ROIC during fiscal 2021 and 2022 was driven by exceptional, largely temporary conditions. During the pandemic, demand for home audio and home theater surged as consumers spent more time at home. At the same time, Sonos benefited from strong pricing, limited discounting, and significant operating leverage as revenue grew faster than its cost base. These factors pushed returns to levels that are unlikely to represent a sustainable long term baseline. The negative ROIC in the past three years reflects a reversal of those tailwinds combined with company specific execution issues. As consumer spending normalized post pandemic, demand for home electronics softened, exposing Sonos’s fixed cost structure and reducing operating leverage. At the same time, the company continued to invest heavily in software, new product categories such as headphones, and platform expansion, increasing invested capital without an immediate payoff in operating profits. These pressures were compounded by the poorly received app overhaul in 2024, which led to customer dissatisfaction, higher support costs, delayed product launches, and weaker near term sales, further depressing profitability. While several years of negative ROIC should not be dismissed, the underlying drivers matter. Sonos continues to generate healthy gross margins and sells differentiated premium products, suggesting the issue has been operating efficiency and execution rather than a structurally broken business or loss of pricing power. In other words, returns have been dragged down by elevated costs and missteps. Looking ahead, ROIC should improve if recent changes translate into more consistent execution. Management has restructured the organization, reduced costs, and refocused the company around its core system based strategy, which should lower fixed costs and improve margins. As software stability improves and customer trust is rebuilt, Sonos should also benefit from fewer returns, lower support costs, and better monetization of its large installed base. It is unlikely that Sonos will sustainably return to the unusually high ROIC levels seen during the pandemic years, as those were driven by extraordinary demand and operating leverage. A more realistic long term outcome is a normalization toward returns that are meaningfully above the cost of capital but below those temporary peaks. The key issue for investors is not whether Sonos can recreate pandemic era conditions, but whether it can consistently earn acceptable returns in a more normalized consumer environment.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. As with ROIC, we do not have equity data before fiscal 2019 because Sonos completed its IPO in September 2018. The increase in equity during the first three years mainly reflects a period when the company was growing profits and keeping most of that value inside the business. From fiscal 2019 through fiscal 2021, Sonos benefited from strong demand, especially during the pandemic, when consumers spent more time and money on home audio and home theater products. The company earned solid profits during this period and did not return much cash to shareholders. As a result, value accumulated on the balance sheet, leading to a sharp increase in equity, particularly in fiscal 2021. The decline in equity over the past four years has a different explanation and does not automatically signal a problem. First, profitability weakened after the pandemic. As consumer spending normalized, Sonos faced lower demand and higher costs, which led to losses in some years. When a company loses money, its equity naturally declines. Second, Sonos has gone through a reset period. Restructuring efforts, organizational changes, and one time costs related to fixing software issues and improving operations have weighed on results in the short term and reduced equity, even though these actions are meant to strengthen the business over time. Whether this is something to worry about depends on why equity is falling. In Sonos’s case, the decline reflects a combination of temporary losses, and short term reset costs, rather than a deterioration of the company’s core products or brand. Sonos still has a solid balance sheet and enough financial flexibility to invest in the business. Looking ahead, equity should stabilize and eventually grow again if Sonos returns to consistent profitability. As the company improves execution, rebuilds customer trust, and benefits from a leaner cost structure, profits should begin to add value back to the balance sheet.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. As a reminder, we do not have free cash flow data before fiscal 2019 because Sonos went public in September 2018. From fiscal 2019 onward, Sonos generated positive free cash flow in most years, with one clear exception. From fiscal 2019 through fiscal 2021, free cash flow increased steadily. This reflects growing scale, improving margins, and strong demand, especially during the pandemic. Fiscal 2021 stands out as a peak year, when cash generation was boosted by unusually strong home audio demand, favorable pricing, and high operating efficiency. Also free cash flow margins were solid during this period, showing that revenue translated efficiently into cash. Fiscal 2022 is the clear outlier. Free cash flow turned negative, and the margin dropped sharply as well. This coincided with a difficult transition period as pandemic demand faded, inventories had to be adjusted, and costs that had been built for a higher demand environment were suddenly too high. This was also a year when cash was tied up in the business rather than released from it. Importantly, this was not a long term trend but a reset year. From fiscal 2023 onward, free cash flow turned positive again and recovered meaningfully. Fiscal 2024 was particularly strong, with a high free cash flow margin, showing that Sonos was able to convert a relatively modest level of profitability into substantial cash. This improvement came even as the company was still dealing with operational challenges, which highlights how cash resilient the model is. In fiscal 2025, free cash flow declined compared to fiscal 2024, but it remained clearly positive. This drop does not mean the business generated less cash at its core. Instead, it mainly reflects temporary cash uses during the year. Fiscal 2025 included restructuring payments and tax related cash outflows that reduced reported free cash flow. If these one time items are excluded, Sonos would have generated more cash than in the prior year. The main takeaway from the free cash flow history is that Sonos usually generates cash even in periods when profits are under pressure. The company does not need to spend heavily on factories or other physical assets, customers typically pay upfront, and cash tied up in the business tends to balance out over time. Because of this, cash generation is more stable than reported profits. It is also worth noting how Sonos uses this cash. Over the period shown, a meaningful share of free cash flow has been returned to shareholders through share buybacks, while the rest has supported product development, software improvements, and balance sheet flexibility. That helps explain why equity and ROIC can look weak at the same time as free cash flow remains positive. The free cash flow yield suggests that the shares are neither trading at a premium nor particularly cheap. We will revisit valuation later in the analysis.

Debt

Another important aspect to consider is debt. I find it essential to assess whether a company has a manageable level of debt that could be repaid within roughly three years, typically by comparing long-term debt to earnings. In Sonos’s case, this is a non issue. The company has no long-term debt and has been debt free since 2020. I generally favor companies without debt, as this provides greater financial flexibility and lowers financial risk, especially during periods of operational volatility. Given Sonos’s sustained debt free position and solid cash generation, it is unlikely that debt will become a concern in the foreseeable future.

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Risks

Macroeconomic factors is a risk for Sonos because its products sit firmly in the consumer discretionary category, meaning demand is closely tied to how confident and financially secure consumers feel. Sonos sells premium speakers, soundbars, and home theater systems that are not essential purchases. When economic conditions weaken, these are exactly the kinds of products consumers postpone or cut back on. This sensitivity was clearly visible in fiscal 2023 and 2024. High inflation reduced consumers’ purchasing power, while rising interest rates increased borrowing costs and squeezed household budgets. As a result, many consumers delayed upgrading their home audio systems or opted for cheaper alternatives. Sonos has explicitly acknowledged that the broader audio category has been under prolonged pressure, with demand softening across markets rather than being a company specific issue. Economic uncertainty also changes how consumers buy. In a tougher macro environment, shoppers become more price sensitive and increasingly wait for discounts. Sonos has had to lean more heavily on promotional events such as Black Friday and Cyber Monday to stimulate demand. While promotions can help move inventory and support short term sales, they tend to pressure margins and are not a sustainable long term growth driver for a premium brand. Over time, frequent discounting can also train consumers to delay purchases, reinforcing volatility in demand. Inflation and cost pressures create a second layer of risk. Higher input costs for components, manufacturing, and logistics can force Sonos to choose between absorbing costs or raising prices. Passing on price increases is more difficult when consumers are already cautious, increasing the risk of volume declines. Finally, housing market trends play an indirect but important role. New home purchases and renovations often drive demand for home audio and home theater systems. When interest rates are high and housing activity slows, this removes another source of demand for Sonos’s products.

Competition is a risk for Sonos because it operates in one of the most crowded and fast moving segments of consumer electronics, where product cycles are short, pricing pressure is constant, and competitors range from traditional audio specialists to some of the largest technology companies in the world. At the most basic level, Sonos competes against a wide set of established audio brands such as Bose, Sony, Samsung and its Harman owned brands, Bang and Olufsen, Sennheiser, and JBL. These companies have decades of experience in sound engineering, strong brand recognition, and broad retail distribution. Many of them offer products across a wide range of price points, which makes it harder for Sonos to defend its premium positioning during periods when consumers are more price sensitive. The competitive challenge becomes even more pronounced when factoring in large technology companies like Apple, Google, and Amazon. These players are not just audio hardware vendors. They operate vast ecosystems that include smartphones, operating systems, voice assistants, smart home platforms, and subscription services. Audio devices are often sold as part of a broader strategy to lock users into these ecosystems rather than to generate profits on the hardware itself. As a result, these companies can afford to subsidize speakers or sell them at very low margins, something Sonos cannot sustainably do. This creates a structural disadvantage for Sonos on price. When competitors discount aggressively or permanently lower prices, Sonos must either hold its premium pricing and risk losing volume or discount and accept pressure on margins. This tradeoff has become more visible in recent years, as Sonos has relied more on promotional periods to drive demand, while competitors continue to flood the market with lower priced alternatives. Ecosystems are another key source of competitive risk. Apple, Google, and Amazon bundle their speakers tightly with their own software platforms, voice assistants, and devices. For consumers already embedded in those ecosystems, choosing a HomePod, Echo, or Nest speaker can feel simpler and more seamless. Sonos positions itself as an independent, open platform that works across many services, but this also means it must constantly ensure compatibility with third party platforms it does not control. Any shift in partner priorities, integrations, or policies can weaken Sonos’s value proposition.

Software updates is a risk for Sonos because its software is not a supporting feature but the core of the entire product experience. Unlike many audio products that can function independently, Sonos speakers and systems depend on proprietary software for setup, control, updates, and integration across rooms, services, and devices. When the software works well, it is a key differentiator. When it does not, it can undermine the value of the entire ecosystem. Sonos regularly updates its software to add features, improve performance, and maintain compatibility with streaming services, voice assistants, and operating systems it does not control. Each update introduces execution risk. Even with testing and quality controls, software changes can lead to bugs, missing features, performance degradation, or reliability issues. Because the app is required to use and manage Sonos products, any problems are immediately visible to customers and difficult to ignore. This risk became very real with the redesigned Sonos app launched in May 2024. The update introduced performance issues and removed or broke features that many customers relied on, including setup reliability and system stability. Customers experienced frustration, voiced complaints publicly on social media and review platforms, and questioned whether the Sonos experience still met its premium promise. The backlash damaged trust and highlighted how quickly software issues can translate into reputational harm. The consequences went beyond customer sentiment. Sonos has acknowledged that the app rollout negatively affected sales of existing products, as potential buyers hesitated amid negative feedback. The company also delayed two planned product launches by a full quarter, directly impacting revenue during an important sales period. In addition, Sonos incurred meaningful short term costs to fix the problems, including hiring additional customer support staff and accelerating software remediation efforts. What makes this risk particularly important is that Sonos positions itself as a system rather than a collection of standalone devices. The app is the connective layer that enables multi room audio, service integration, and long term product value. If the software experience is unreliable, customers may stop expanding their systems, recommend the brand less frequently, or even consider switching to simpler or more tightly controlled ecosystems offered by competitors. There is also an ongoing dependency risk. Sonos must continuously adapt its software to changes made by third party partners such as streaming services, mobile operating systems, and voice platforms. Any breakdown in compatibility, delays in updates, or uneven performance across devices can degrade the user experience without Sonos fully controlling the timeline or scope of those changes.

Reasons to invest

The Flywheel business model is a reason to invest in Sonos because it explains how the company can grow organically over long periods of time without relying solely on constant new customer acquisition. Instead of selling one off products, Sonos is built around a system that compounds in value as customers deepen their relationship with the brand. The flywheel starts when a household buys its first Sonos product. That initial purchase introduces the customer to the Sonos ecosystem, where sound quality, ease of use, and seamless integration across rooms create a differentiated experience. Once inside the ecosystem, customers are far more likely to add additional products over time, such as more speakers for new rooms, a soundbar and subwoofer for home theater, portable speakers, or headphones. Each added product increases the usefulness of the system and raises the cost, both financial and emotional, of switching away. This behavior is clearly visible in Sonos’s data. By the end of fiscal 2025, the average household owned 3,13 Sonos products, while multiproduct households averaged 4,49 devices. Importantly, nearly half of all new product registrations came from existing customers, showing that repeat purchases are a core growth driver rather than a secondary benefit. Management also believes these numbers are far from saturated, noting that a fully realized Sonos home could include significantly more devices over time. What makes this flywheel particularly attractive is that it is driven by customer satisfaction. Sonos focuses on keeping the system fresh through software updates, improved services, and new product categories that open up additional use cases. This encourages households not just to buy more products, but to keep upgrading and reinvesting in the system over many years, potentially decades. The flywheel also creates a large built in growth opportunity from the existing customer base alone. Management estimates a multi billion dollar revenue opportunity simply from increasing the number of devices per household and converting single product households into multiproduct ones. This means Sonos does not need to depend entirely on expanding the overall audio market to grow. Much of the upside can come from better monetizing customers it already has. As the installed base grows, the flywheel reinforces itself. A larger base of connected devices makes the platform more attractive to content and technology partners, improves brand visibility through word of mouth, and increases the return on software and product investments. Each turn of the flywheel makes the system more valuable for both existing and new customers.

Innovation is a reason to invest in Sonos because it sits at the center of how the company expands its market, strengthens its ecosystem, and reinforces its long-term competitive position. Sonos has never competed by being the cheapest option. Instead, it has built its brand around delivering technically advanced products that raise the bar for sound quality, design, and ease of use, and recent product launches show that this approach remains very much alive. A key pillar of Sonos’s innovation strategy is category expansion. The launch of Ace marked the company’s entry into the premium over-ear headphones market, extending Sonos beyond the home into personal listening. Strategically, this broadens the addressable market and allows Sonos to follow its customers into more listening moments throughout the day. Ace builds on Sonos’s core strengths in sound engineering, spatial audio, and ecosystem integration, positioning headphones as another entry point and reinforcement mechanism for the broader Sonos system rather than a standalone experiment. Over time, this category has the potential to deepen engagement and strengthen the flywheel through additional use cases. Sonos aims to introduce at least two new products each year, balancing selective entry into new categories with continued evolution of its existing portfolio. This steady cadence helps keep the product lineup relevant, supports repeat purchases from existing customers, and creates regular opportunities to expand the value of the ecosystem within each household. Importantly, innovation at Sonos is increasingly focused at the system level rather than on individual devices. Management has been explicit about returning to Sonos’s roots as a system company, where hardware, software, and services work together as a unified platform. With more than 17 million households and over 53 million connected devices already in use, Sonos has a large installed base on which to layer new experiences, interactions, and services over time. This shift significantly expands the long-term opportunity. Sonos currently holds only a small share of the global premium audio market, and management believes there is meaningful room to grow both by taking share and by expanding the overall sound system category it originally created. Continued investment in innovation, combined with a system-first strategy, positions Sonos to compound value over time and benefit as demand normalizes and new product cycles accelerate.

A more focused and disciplined operating model is a reason to invest in Sonos because it directly improves profitability, resilience, and long-term earnings power without undermining the company’s ability to grow. Over the past several quarters, Sonos has undergone a broad operational transformation aimed at simplifying the organization, tightening cost controls, and reallocating resources toward the areas with the highest long-term return. As part of this effort, Sonos has reduced its operating expense run rate by more than $100 million, embedding financial discipline across product development, marketing, and corporate functions. This was not a one-off cost cut, but a structural reset in how the company operates. The impact of this shift is already visible in the results. Profitability improved year over year because costs were brought under better control while sales stabilized. This comes after a period when expenses had grown faster than demand, which left the company vulnerable when the market slowed. By adjusting its cost structure to better reflect normal demand, Sonos has made the business more resilient and better positioned to benefit when growth returns. Importantly, this improvement did not come at the expense of future growth. While overall costs have been reduced, Sonos has continued to invest selectively in areas that matter most to the long-term strategy. These include improving the core software experience, expanding internationally, and investing in talent. The key difference versus the past is that investment decisions are now more deliberate, with clearer prioritization and accountability. A leaner operating structure also makes Sonos more adaptable. Consumer electronics demand can be volatile, and companies with bloated cost structures often struggle during downturns. By becoming more nimble, Sonos is better positioned to absorb demand fluctuations, respond faster to market changes, and protect profitability during weaker periods while still benefiting when demand improves. From an investor’s point of view, this shift matters because it improves how growth translates into profits. With a lower and more flexible cost structure, more of each additional dollar of sales can eventually turn into profit. As Sonos returns to growth and continues to build its system-focused strategy, profitability should improve naturally over time without the need for further major cost cuts.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. For this calculation, I used an EPS of $0,64, which is the non-GAAP EPS from fiscal year 2025. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 19,4% over the next five years, but 15% is the highest I use.  Additionally, I have selected a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on Sonos' historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $19,20. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Sonos at a price of $9,60 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 137, and capital expenditures were 29. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 20 in our calculations. The tax provision was 11. We have 120,9 outstanding shares. Hence, the calculation will be as follows: (137 – 20 + 11) / 120,9 x 10 = $10,59 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Sonos' Free Cash Flow Per Share at $0,90 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $14,21.

Conclusion

I believe Sonos is an interesting company with capable management that has built a clear moat through its integrated system, strong brand, and software platform. While Sonos has delivered a mixed ROIC since becoming public, this is expected to improve as recent operational changes take hold, and the company has remained free cash flow positive in most years, a trend that should continue given the underlying cash generation of the business. That said, there are meaningful risks to consider. Macroeconomic conditions are an important risk because Sonos sells premium, non essential audio products, which tend to see weaker demand when consumers face financial pressure from inflation, high interest rates, or economic uncertainty, while a softer housing market can further reduce demand for home audio systems. Competition is another key risk, as Sonos operates in a crowded market with constant pricing pressure from both established audio brands and large technology companies that can subsidize hardware within broader ecosystems, forcing Sonos to carefully balance premium pricing against discounting to protect volumes while competing with tightly integrated platforms from Apple, Google, and Amazon. Software execution also remains a risk because Sonos products rely on proprietary software to function as a unified system, meaning that bugs or failed updates are immediately visible to customers, as demonstrated by the 2024 app redesign, which hurt trust, delayed product launches, and weighed on sales. On the positive side, the flywheel business model supports long term growth, as satisfied customers tend to buy additional products over time, increasing lifetime value and driving organic growth without relying solely on new customer acquisition, while a growing installed base makes the system more valuable and strengthens customer loyalty. Innovation further supports the investment case, as Sonos continues to expand into new categories, deepen its system level ecosystem, and reinforce its competitive position without competing on price, allowing value to compound over time. Finally, a more focused and disciplined operating model has structurally lowered costs while preserving investment in growth, making the business more resilient and increasing the likelihood that future revenue growth translates into higher profitability. Overall, I view Sonos as a good business, but I believe there are more attractive opportunities elsewhere in the market, so I will not be investing in Sonos at this time.

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