The one thing I’ve learned writing about stocks for nearly 20 years is that class action lawsuits should not scare you away from a stock. They’re as common in America as the common cold. 

In Monday’s trading, Sonder Holdings (SOND) finished the day ranked 100th in Barchart’s Bottom 100 stocks to buy. On Tuesdays, I write about companies in the top or bottom 100. 

Sonder caught my eye for two reasons.

First, it moved down 25 spots yesterday from 75th on Friday. Its weighted alpha was -73.88, which means its recent returns haven’t been all that good. On the bright side, the move to 100th indicates the losses have slowed. It could soon leave the rankings. 

Secondly, its stock is up 34% year-to-date, well off its 52-week low of $2.33 in mid-January. While it could mean you’ve already missed the boat and will likely fall back into the $2s, it could also mean it will gradually move out of penny-stock status toward $10 in the months ahead.

A small wager could be a moneymaker if you're an aggressive investor. Here’s why. 

Who Is Sonder Holdings and Why Should You Care?

On the surface, Sonder is a poor version of Airbnb (ABNB).

Originally called Flatbook, the company's investor relations website states, “Sonder provides a variety of accommodation options—from spacious rooms to fully-equipped suites and apartments—found in over 40 markets spanning ten countries and three continents.” 

Officially founded in 2014 by Francis Davidson while he was attending college in Montreal, an article from CNBC in 2021 first caught my attention about Davidson and his company. It didn’t hurt that Jeff Bezos backed the company. 

Davidson started by renting out his three-bedroom apartment, which he shared with other McGill University students for the summer of 2012. He and his roommates netted over $9,000 from subletting his apartment. He started doing that for other McGill students and then expanded to doing the same in different cities. 

That alone would have been a lucrative business. After all, students go home for the summer but still have their apartments to rent out before they go. Davidson handled that for them. Businesses that make or save people money and time will always do well. 

As a result, Davidson dropped out to build the business full-time with his partner, Lucas Pellan.   

The IPO and Beyond

Fast-forward to January 2022. The company completes its merger with Gores Metropoulos II, a special purpose acquisition company (SPAC). By this time, Pellan had left the company. 

A couple of months later, Sonder reported Q4 2022 and full-year results. In Q4 2022, its revenues were $135 million, 56% higher than a year earlier. Its RevPAR (revenue per available room) was $158, 11% higher year-over-year. However, it had an operating loss of $59 million. For the year, its revenue was $461 million, nearly double its 2021 result. Its operating loss was $284 million, 9% higher than in 2021. 

It was still in expansion mode, so an operating loss isn’t unusual. For example, Airbnb didn’t start making GAAP operating profits until 2021. Despite the fall in its share price, its stock remained well above $30 through 2022 and into 2023. 

As of last November's release of its Q3 2023 results, the business and its financials seemed to be in good shape. 

“A year ago, for every dollar of revenue generated, Sonder burned 31 cents. Twelve months later, that figure has dropped to 10 cents as revenue has grown 29%, Davidson stated in its Q3 2023 shareholder letter. 

“The progress we've made over the last quarter is attributable to cost discipline -- every expense has been scrutinized for its ROI, and every department has been successful at delivering operating efficiencies.”

For the nine months ended September 30, 2023, it generated an operating loss of $184 million from $439 million in revenue. Meanwhile, while its revenue increased by 29%, its operating expenses rose by a smaller 13%. It still seemed to be heading in the right direction.

The Financial Restatements Begin

The day before Sonder released its Q3 2023 results, its shares still traded above $8. Then, on March 15, it announced that it would delay its Q4 2023 results due to accounting errors in its 2022 and 2023 results. 

“The Company recently identified accounting errors related to the valuation and impairment of operating lease right of use assets and related items for the fiscal years 2022 and 2023,” its press release stated. 

While its revenues will still grow by nearly 31% in 2023, its net loss will be more significant, perhaps more extensive. Hence, the class action rhetoric. 

I’ve never understood why someone would invest in a company that’s losing money -- GAAP and non-GAAP -- and sue because they were somehow fraudulently misled. Investors in Sonder knew the situation wasn’t perfect. To claim Sonder management misled you seems farfetched. 

But class action lawyers have to be suing. That’s how they make money. 

An interesting aside. An April 22, 2024, press release from Pomerantz Law Firm soliciting Class Action plaintiffs stated the following:

“You have until June 10, 2024, to ask the Court to appoint you as Lead Plaintiff for the class if you are a shareholder who purchased or otherwise acquired The Children's Place securities during the Class Period. A copy of the Complaint can be obtained at www.pomerantzlaw.com.”

The law firm forgot to replace The Children’s Place (PLCE) with Sonder Holdings. But I digress. 

The Bottom Line on Sonder

Here’s the deal. Airbnb trades at 10.5x sales. When it first went public in 2020 and lost money, it traded at 21x sales. At the same multiple, and excluding the restatements, Sonder would be valued at $12.7 billion. Cut that in half; it’s still in the billions, not $48 million. 

Here’s a play: Sonder’s June 21 $7.50 call (59 days to expiration) had an ask price of $0.20 in Monday trading. That’s a down payment of 1.7%. I have larger Starbucks orders than that. 

This seems like a reasonably low-risk proposition if you're an aggressive investor.  

 

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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.