Sonos Breaks Down Amid Profit-Taking After Q3 Results

Revenue beat expectations, but profit fell short

Sonos, Inc. (SONO) shares fell more than 15% after the company posted a wider-than-expected third quarter loss. Revenue fell 4.2% to $249.3 million, beating consensus estimates by $14.9 million, but net losses came in at 52 cents per share, missing consensus estimates by 28 cents.

Revenue was negatively affected by the closure of retail stores around the world, but the damage was mitigated by a successful direct-to-consumer strategy. During the third quarter, management said that direct-to-consumer revenue nearly tripled year over year and that positive demand for products exceeded the company's expectations.

Gross margins fell 110 basis points to 44% during the quarter due to the introduction of tariffs in September 2019. Excluding tariffs, gross margins would have improved 60 basis points to 45.7% and were even higher when excluding expedited freight cost to increase inventory levels to fill backorders and meet higher-than-expected demand.

Prior to the earnings report, Raymond James downgraded Sonos stock from Strong Buy to Market Perform and removed its price target. Analyst Adam Tindle said in a July 19 note that it was a tactical time to step aside given that new product releases were unlikely during the second half of the year amid ongoing cost-cutting efforts.

Chart showing the share price performance of Sonos, Inc. (SONO)

From a technical standpoint, Sonos stock fell sharply lower toward the 50-day moving average at $14.65 during Thursday's session. The relative strength index (RSI) fell to moderate levels of 44.31, but the moving average convergence divergence (MACD) continued to trend lower. These indicators suggest that the stock could continue to give up ground.

Traders should watch for a breakdown from the 50-day moving average toward the 200-day moving average at $12.69 over the coming sessions. If the stock rebounds higher, traders could see a move to retest highs at $17.83. Upper trendline resistance stands at $19.00, although those levels appear less likely to be reached in the near term.

The author holds no position in the stock(s) mentioned except through passively managed index funds.

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