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The so-called internet-of-things was supposed to sprinkle Silicon Valley stardust on ordinary old-economy industrial companies. Add chips and software to everyday stuff, and the result is recurring revenue, higher margins and tech-style valuations.
This has brought two risks. First, that company valuations get ahead of themselves. Second, that investors forget the charms of the analogue world — for example, avoiding the risk of catastrophic chain reactions such as the one now gripping wireless speaker-maker Sonos.
The company, founded by engineering graduate students in California some 20 years ago and listed in 2018, builds stylish home sound and theatre systems. But what made its name for the yuppie set was software that seamlessly connected its range of wireless devices to audio sources.
It has, however, hit a dud note. Last May Sonos released an updated smartphone app — essentially the control centre for its products — that proved buggy and, in the worst user experiences, rendered much of the Sonos suite inoperable. That cost the company $100mn in revenue last year — just under a tenth of its total — and the chief executive his job.
Its mastery of both the physical and digital realms diminished, Sonos is in a tricky spot. Customer loyalty will inevitably be hit. Yet its strategy is, over time, to sell new products into existing Sonos households. Indeed, it counts just over 16mn unique account holders but more than 45mn registered devices. In its last fiscal year, 44 per cent of new products were purchased by existing households.
As an investment, too, Sonos shares have been pitchy. New product cycles make for volatile revenue, which peaked at nearly $1.8bn in 2022. While the group’s shares have dipped by two-thirds since the 2021 pandemic home-spending bump, its $1.6bn enterprise value is still a loud 14 times steady-state 2026 ebitda according to Morgan Stanley analysts. Quarterly earnings on Thursday will provide clues on how the company can recover from this painful technical stumble.
Software was supposed to eat the world. But even the most magnificent code can create worrisome vulnerabilities. Software and computing power have increasingly become cheap and reliable and will become more so in the AI age. Everything will be connected. Everything, then, will be potentially exposed to the risk of code glitches.
Many companies, even old-economy enterprises, will not be able function without their 0s and 1s in the right order. A fancy speaker fail, while irritating for the well-heeled, is tolerable. But electric vehicles, power grids and medical devices are becoming not just software-based but software-dependent. Sonos sets the tone for a new kind of investment risk.
sujeet.indap@ft.com
