Sonos, the wireless audio maker that went public nearly six months ago, is already struggling given the broader market downturn and a historically tough environment for standalone consumer electronics firms. But the company could be an attractive acquisition target–if it can first repair its deep accounting flaws.
Sonos enjoys a solid reputation for making high quality premium wireless speakers, a big reason why the former unicorn raised $248 million from private investors prior to its IPO. But its product expertise has not translated into the public markets. Since going public at $15 per share in August, the largest consumer electronics stock debut in 5 years, Sonos shares hit $20 per share before falling below $11 per share.
Part of Sonos’ misfortune has been what appears to be a general market correction. But history has not been kind to pure play hardware companies: since its IPO, FitBit’s valuation has plunged to $1.24 billion from $6.1 billion, while GoPro’s market cap fell to less than $700 million from $3.9 billion.
These companies face overwhelming competition from platform giants like Google , Apple, and Amazon which don’t sell any one thing so much as they sell integrated sets of products and services that work seamlessly with each other.
Think of how consumers can subscribe to Apple Music or iCloud through MacBooks, iPhones, and iPads. Or Amazon Prime members can access the Washington Post, the newest episode of The Man in the High Castle, and grocery deliveries from Whole Foods, which Amazon acquired last year for $14 billion.
For consumers, why would they buy individual products when they are already so deeply invested in these tech ecosystems? Indeed, Sonos stock sharply fell after Amazon said it would expand its line of wireless speakers. Amazon will also use its formidable ecosystem to entice consumers to sign for its AWS cloud computing business so they can store and back up the data.
Throw in voice-assisted technology like Alexa and Amazon becomes even more prevalent in the smart home. Indeed, the company’s $200 million venture capital arm, called the Amazon Alexa Fund, has already taken positions in Internet of Things startup focusing on cybersecurity, energy and utilities, and kitchen appliances.
The pace of innovation has also quickened. So a publicly traded consumer electronics company that makes only or two products might see their products out of date within a short period of time.
So it seems logical for Sonos to seek a buyer– not from a direct competitor like Amazon but perhaps a company that could give Sonos real muscle, especially when it comes to marketing and distribution.
Someone like Best Buy.
The home is the future
Best Buy, the world’s largest consumer electronics retailer with 1,000 stores in the United States alone, has not been aggressive with mergers and acquisitions. But the company owns a number of proprietary brands like Rocket Fish, Magnolia, and Insignia brands.
Moreover, Best Buy sees the smart home and Internet of Things as the future of its business. The company is focusing on turning its Geek Squad brand, which traditionally focused on computer repair and tech support, into a service that visits people’s homes and helps them install and connect various devices, from smart refrigerators and washing machines to televisions and security alarms.
Such employees can also advise consumers on what devices and technology to buy, providing the retailer an important sales channel directly into their homes. Imagine Best Buy helping to create an ideal home entertainment room by offering Sonos soundbars, Magnolia television and stereos and Geek Squad installation/support.
Brittain Ladd, a retail consultant and former strategy executive at Amazon, said that instead of just selling smart devices, retailers should develop deeper relationships with vendors and help design, install, and connect these technologies in homes and businesses, he said.
And in order to effectively do that, retailers need to look at some acquisitions, Ladd said.
“If retailers want to be in the home, they have to go all the way,” he said.
Accounting flaws raises big questions
However, Sonos does carry a significant red flag. In both its S-1 prospectus and 10K annual report, the company said it identified problems last year with its accounting and auditing systems that could materially impact the accuracy of its future financial reports.
“During 2017, we identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We identified a material weakness related to an insufficient complement of experienced personnel with the requisite technical knowledge of financial statement disclosures and accounting for non-routine, unusual or complex events and transactions
We cannot assure you that the measures we have taken to date, and that we are continuing to implement, will be sufficient to remediate the material weaknesses we have identified or avoid the identification of additional material weaknesses in the future. If the steps we take do not remediate the material weaknesses in a timely manner, there could continue to be a reasonable possibility that these control deficiencies or others could result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected on a timely basis.”
This is a pretty significant– and rare– admission. You don’t usually see companies disclosing such severe accounting problems, especially before a high-profile IPO. Though the issue didn’t seem to impact the stock offering, Sonos said investors going forward might not be able to properly value the company because Sonos can’t necessarily vouch for own numbers.
The accounting problems also might complicate a potential sale if a prospective buyer can’t perform effective due diligence on the business.
Moving forward, Sonos investors should treat the company’s numbers with a good deal of skepticism, at least until the company can say it definitely fixed its accounting. Even then, the company’s best strategy may lie not as an independent business but rather a union with a major retailer like Best Buy.