Will Apple Really Buy Sonos? Probably Not.
The idea is certainly intriguing. On June 22, infamous research shop Citron made a case for Apple buying home speaker maker Sonos. In fact, this is not the first time that the idea has been tossed around.
According to analyst Andrew Left, Sonos resembles the Cupertino company in that it has created a “sticky platform” and a loyal customer base. Trading more like GoPro than Apple, Mr. Left thinks that Sonos’ valuation is low enough to attract an acquisition bid.
Could Apple do it? Sure.
Let’s start with the following question: can Apple pull off the deal and gobble up Sonos? The answer is a resounding yes.
As the chart below depicts, Apple’s coffers are jam-packed. The company’s net cash position (cash and investments minus debt) stood at over $83 billion in the most recent quarter. Granted, this figure is much lower than the $113 billion of a year ago, as Apple continues to aggressively buy back stock and make dividend payments. Still, the balance is about 40 times what I estimate would cost Apple to acquire the home speaker company.
In my view, Apple’s liquidity is also very well protected by robust fundamentals. Free cash flow in 2019 was quite high, at about $67 billion. Even in the most recent quarter, which was marked by the start of the COVID-19 crisis and a dip in hardware sales, Apple managed to increase FCF year-over-year by a respectable 30%.
Will Apple do it? Probably not.
The more important question is: even though Apple can acquire Sonos, will it do it? I believe not.
For starters, Apple already has a smart speaker business, the HomePod. Yes, the company has not been very competitive in the space, and it currently holds an unimpressive 2.8% market share. Should Apple acquire Sonos, this number would increase to a more meaningful 7.5% (see chart below).
But it is not clear to me what else Sonos could bring to the table regarding technology, production capabilities or even brand identity – in fact, virtually nothing can beat Apple’s name recognition and admiration. Were Apple brand new to the space, Sonos could be the foot in the door. Now, I believe it is a different story.
Second, I think that Sonos fills a “middle of the road” slot in the market that may not appeal much to Apple. Sonos supplies neither the high-end products that the HomePod has proven to be, nor the low-end devices that would allow Apple to penetrate the largest possible number of households – i.e. the Amazon strategy with Echo and Dot.
Finally, Apple is not known to be active in M&A. The largest acquisition that Apple has ever made was the $3 billion purchase of Beats in 2014, followed from a distance by the $1 billion acquisition of Intel’s smartphone modem division. In both cases, the deals were very strategic to other, much more important businesses: Apple Music and ARM-based devices like the iPhone, respectively.
Conclusion: don’t hold your breath
On the surface, acquiring Sonos might make sense for Apple. But look one layer deeper, and it becomes more evident that the deal would provide the Cupertino company with a larger slice of the smart speaker market, and not much more.
I continue to think that any extra cash that Apple produces will be first returned to shareholders, and then applied to highly strategic M&A. In the pecking order, I believe that acquiring Sonos ranks low.
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