US-China Trade War: Should You Avoid Sonos?

Sonos (NASDAQ:SONO) is known for its highly successful smart speakers business. Of course, the company also offers other home sound system accessories. Shares have climbed 57% in 2019 as of close on November 25.

The stock has performed extremely well since its initial public offering in August 2018. However, the company recently warned that the impact of tariffs would have a negative impact on earnings in fiscal 2020. Sonos said that earnings were likely to decline by as much as 19% in fiscal 2020 due to new tariffs placed on Chinse-manufactured goods.

In the fourth quarter of 2019, Sonos reported record revenue of $294 million. This was up 8% from the prior year. However, it also posted a net loss of $30 million and a loss on an adjusted EBITDA basis of $3 million. It expects revenues to rise between 8% and 11% in fiscal 2020, which is in-line with its long-term growth targets.

Sonos has responded to the tariffs by accelerating its supply chain diversification into Malaysia. This is expected to mitigate the damage into 2020 and beyond. There are also hopes that tariffs may be rolled back as the United States and China try to work out a limited trade deal, but progress has been slow. Further hiccups in talks could lead to more damaging tariffs imposed by the Trump administration as we enter the New Year.

Tariffs may be a pain in the near term, but Sonos has carved out a major competitive advantage in this market. The stock is trading at a premium right now. Investors should monitor this one and jump on any entry points that present themselves in this choppy trade environment.