Doubling our $$$ on Sonos ($1.7B)

🧠 The Takeaways

Today we’re buying Sonos and putting it back on the correct Luxury Electronics path to double our money.

1. Sonos needs to return to pure Luxury Electronics.

2. Flip its strong brand into a B2B play.

3. Sell it to RH to dominate the Luxury Smart Home market.

+ Why I want to own a home, but know it’s not an investment.

Let’s Community - Mortgages are Branding Scams

This post popped off on LinkedIn a couple of weeks ago. And I want to dive deeper.

Let me clarify a few beliefs:

1. I’d love to own a home.

2. I’ll most likely need a mortgage.

3. Everyone deserves a roof over their heads.

But “a mortgaged home is the best investment you’ll ever make” is a complete scam. 

Buying a home is a purchase, not an investment, and if you ever talk to an honest banker, they’ll tell you that purchasing a home with a mortgage is a liability, not an asset.

It’s one of the greatest branding moves ever: convincing people that owning a home is a sign of success in life and a key life moment to “growing up”. 

Banks convinced everyone of an American dream (white picket fence 2 kids + a dog) in the 50-60s. What did most Americans need to afford that major purchase?

You guessed it. 

Just because something is a social norm doesn’t mean it always was. Someone who makes a profit from it usually plants that seed.

Let’s Examine This Biz

Note: As always, none of what follows is legal, tax, investing, financial, or any other sort of advice. I’m not a current investor in Sonos. And I was never here 😉.

Sonos (your rich uncle’s favorite speaker biz) was founded in 2002. This luxury home audio system was the go-to for wealthy people to build integrated sounds systems into their house. 

Now it’s dying a painful, slow death. 

• Trading at $14.06/share

• $1.7B market cap

• +2% L5

Launching app updates isn’t the only problem it has. If it doesn’t correct itself quickly, it’ll find itself on the bankruptcy watchlist.

Financial Summary

TLDR Analysis:  This biz is Toast

• 2 years of declining sales. 😰

• Increasing Marketing/Sales expense with declining Sales 🤡

• Flat OPEX 2 years in a row. ❌

Sonos is digging themselves out of a hole with a pickaxe instead of a shovel. The solutions to their challenges aren’t brute forcing a strategy that isn’t working. 

They need to develop the self-awareness to see they’re running an overextended biz model. To move forward, they first need to pull back.

Let’s Fix This Biz!

Here are the 3 ways I’ll re-focus Sonos to justify the $4B valuation we’ll sell it for.

1) Gut the Product Catalog

Customers who spend $10k vs $180 on speakers are not the same.

Moving into a more competitive, lower-priced market is always a losing strategy unless you’re the largest player in the space and can kill everyone on costs through economies of scale. 

Sonos is deluding themselves as a consumer electronics biz instead of a luxury speaker manufacturer. 

They needs to drop their low-end products where consumers are comparing them to JBL (incredibly embarrassing for Sonos).

They need to streamline the brand + catalog around their best customers to grow faster. It’s not just bad inventory investments that will lead to the discounting death spiral, but bad branding.

1. Less wealthy customers will be confused why a luxury speaker biz is selling “expensive” cheaper speakers.

2. Wealthy customers will mentally downgrade the brand to the lower price point products.

Sonos is another ex of a brand needing to “grow” too much to justify their COVID valuation. Now they’re paying the price.

Takeaway: Up- or down-market. Pick a lane and go all in.

2) Become a Luxury Car OEM

Once you’ve built a brand like Sonos, moving into partnerships is the fastest way to profitably expand. 

Sonos already supplies the speakers for the Audi Q4 e-tron.

That’s great but not a meaningful B2B biz. 

To become the next Dolby, they need to hire ex-Audi, Lexus, and BMW sales reps and get into every $80k+ car.

There are only a handful of major purchases where someone’s willing to spend thousands of dollars on speakers.

Sonos needs to be there for every moment monetizing every luxury audio experience.

Takeaway: Big Brands profit from better B2B partnerships.

3) Sell to RH (Restoration Hardware)

This would be a pretty big bite at ~25% of RH’s market cap, but also would be a major addition that gets RH into the Home Theater + the Home IOT market.

The real asset in Sonos’s treasure chest is their App that controls the speakers. 

We talked about this in the Luxottica newsletter: every device biz needs to become a tech company before tech companies master devices.

RH can backdoor into the wealthy Smart Home market: speakers, thermostats, smart locks, etc. They can create the luxury versions of hot Smart Home products that Big tech produced over the last decade.

RH at $10B moving into Luxury Tech puts them on a completely different trajectory. 

The key will be nailing the integration of the luxury smart home products and smoothly sync everything together like Apple. If we hit it just right Apple might acquire RH.

Takeaway:  Product Expansion + Increase the core services

Final Thought

I’ve said this to multiple brand founders in the middle of exponential growth:

Focus on less. Don’t do more. 

Sonos is an incredible ex of the other side of more more growth.

The fastest way to grow isn’t adding more products or channels. It’s making the biz more aerodynamic. Simpler catalogs, messaging, and offers.

Dig deeper wells before starting to dig new ones.

Every new product creates more drag and slows you down as you try to go faster.

It’s counterintuitive. But real growth comes down to streamlining the biz.

Instead of adding more, brands need to strip down their catalog/offering to their bare basics where you can go 2 miles deep and really master what’s working.

If you’re in the right market with the right channels, you’ll scale faster, more profitably, and with less stress.