A big win for Sonos (SONO) on the patent front against Google may unlock more gains for the stock price than the initial 12% pop seen in pre-market trading on Monday.
A U.S. International Trade Commission judge ruled Friday that Google infringed on Sonos’ patents. The suit began in January 2020, with Sonos claiming Google infringed on five of its smart speaker patents by putting its technology in Google products. Sonos wanted a sales ban on several Google products such as Nest home speakers, Pixel smartphones and Chromecasts.
“We don’t believe they are recognizing the value that is there. In trying to work it out in terms of talks, we felt this was the step we had to take in order to make sure we are properly getting the value we deserve,” Sonos CEO Patrick Spence told Yahoo Finance Live early on in the fight against Google.
While it’s a nice win for Sonos, a final decision isn’t expected from the International Trade Commission until mid-December.
By then the stock could be much higher, analysts reason, as the decision validates Sonos’ extensive patent portfolio, which has been pitched as a key asset by management since the company went public back in 2018.
‘Tailwinds to margins’
The win sets the table for Sonos to secure potentially lucrative licensing deals from tech companies that may be infringing on its patents.
“We note that Sonos boasts a portfolio of over 2,149 utility and design patents, granting them one of the most valuable patent portfolios in consumer tech. We believe Google is likely one of many companies infringing on Sonos’ patents, and suspect their win against Google will set a precedent for other infringers. Today, less than 5% of Sonos’ revenue comes from licensing, but believe it can become a larger portion over time as infringers cut deals with Sonos. Licensing revenue should provide further tailwinds to margins as it becomes a larger mix of overall revenue,” said Jefferies tech analyst Brent Thill.
Thill upgraded Sonos shares to Buy with a $50 price target in the wake of the Google decision. Thill also cited a strong fiscal third quarter of product demand for Sonos. The company reported last week that fiscal third quarter sales surged 52% from a year ago. Operating profits rose to $46.7 million from a loss of $2.7 million a year earlier.
“Following validation from the ITC of the strength of SONO’s patent portfolio, we increasingly view their patent portfolio as a competitive advantage, granting SONO an edge against competitors in the audio market. We believe their IP will allow them to continue to out-innovate others in the industry, driving rev and market share higher over time,” Thill added.