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Sonos Inc. shares are surging Monday after the company secured a victory in a patent dispute with Alphabet Inc.’s Google, suggesting to analysts the possibility of a greater revenue stream through licensing.
A judge from the U.S. International Trade Commission ruled Friday that Google
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infringed on five Sonos
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patents related to audio functions, which analysts say could ultimately help Sonos extract royalty arrangements with Google and other companies that may be infringing on the audio company’s patents.
“This decision re-affirms the strength and breadth of our portfolio, marking a promising milestone in our long-term pursuit to defend our innovation against misappropriation by Big Tech monopolies,” Sonos Chief Legal Officer Eddie Lazarus said in a statement.
Google didn’t respond to MarketWatch’s request for comment on the ruling.
Shares of Sonos are up 8.5% in Monday trading.
The company’s “strong patent portfolio” is one reason why Jefferies analyst Brent Thill feels increasingly optimistic about the stock. He upgraded it to buy from hold Monday, while raising his price target to $50 from $43.
“Sonos has one of the richest patent portfolios in consumer electronics, and their ITC win against Google is a strong validation of their positioning,” Thill wrote. “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.”
Licensing is a high-margin business for Sonos, Thill continued, and while it currently accounts for less than 5% of the company’s revenue, he sees room for growth over time. At the same time, he cautioned that the ITC win “is just one part of a larger process” to get financial compensation from Google.
Thill is also upbeat about the company’s core business and expects that Sonos can keep the momentum alive after two “monster beat and raises” for the company’s earnings reports. He called the company’s fiscal fourth-quarter outlook conservative and argued that Sonos could continue benefiting into 2022 thanks to “a large backlog of existing orders” due to a supply-demand imbalance.
Morgan Stanley’s Katy Huberty called the ITC ruling an “important milestone” for the company and also argued that it could help Sonos “gain greater leverage to unlock value from Google, with the ultimate goal of negotiating a portfolio license, similar to licensing/royalty deals Sonos has negotiated with other firms in the past.”
She noted that Sonos claims that more than a dozen Google products infringe on its patents, equating to more than 100 unit shipments in the U.S. from October 2016 to March 2021.
Huberty has an overweight rating and $51 target price on Sonos shares, which have gained 22.9% over the past three months as the S&P 500
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has risen 6.8%.
