Mad Hedge Technology Letter
January 20, 2021
Fiat Lux
Featured Trade:
(THE CONTRARIAN PLAY)
(ADT), (GOOGL)
Posts
How about a tech contrarian play focused on one of the more primitive areas of technology?
And did I say it’s cheap?
Among the discounted tech equities out there is security specialist, ADT (ADT), that is increasingly using technology as solutions for its customers.
This time, I am talking about normal folks just wanting to live their lives, the collective desires certainly trend towards investors buying security home solutions ADT stock that use technology to protect your home.
Yes, this isn’t a sexy tech stock, but not all are.
And contrary to initial thought, crime has gone down nationally during the pandemic because more people working from home meant less opportunity for trouble to come about the home.
The US set records for decreases in residential burglaries last year, but we all know that it will be different when the freedom of autonomy picks up and we are out of our houses on Friday and Saturday night.
Even in the Great Recession of 2008, crime increased presumably to financial desperation and need.
This sets the stage for ADT to experience more buying as we press into 2021.
What is the bull case as we dig into the weeds?
The ability to get on-premise security solutions today is markedly better than what it was a year ago or the ability three or four months ago.
The strength in execution resulted in ADT finishing Q3 with strong backlogs, the highest of the year.
They had solid sales in install in October as well.
So it's broadly diversified, much of it tied with getting access to the premises.
I’m optimistic about the commercial business with total revenue up sequentially in Q3.
The business includes a largely recurring revenue base of 35%.
It's buoyant and durable, highly diversified stuff. ADT is just shy of 250,000 customers in the commercial business.
There is upside in new and growing verticals, healthcare, education, government, critical infrastructure.
ADT also boasts the best service in the space, and that's the most critical source of differentiation.
Even though the total reported revenue in the quarter was essentially flat year-over-year, 2021 should translate into a “growth” year.
Installation and other revenue increased by $46 million, driven mainly by higher reported residential outright sales revenue resulting from the Defenders acquisition.
This increase was partially offset by lower installation revenue to commercial customers resulting from pandemic-induced economic challenges.
Monitoring and services revenue was up slightly year-over-year.
ADT generated $127 million of adjusted free cash flow during the third quarter. And through the first nine months of 2020, their adjusted free cash flow of $532 million is up more than 15% from the $459 million during the same period in 2019.
The strong year-to-date cash performance comes from a myriad of factors that more than offset the higher cash interest, including subscriber acquisition cost efficiency and the benefits from some favorable cost base trends in the current operating environment, along with some timing items.
First, the new direction with Alarm.com includes the launch of a first-generation ADT + Google offering developed through the commitment by Alarm.com that will result in several tailwinds.
First, it leverages the foundation and extends Command and Control until the end of 2022, and then beyond that, allows that platform to support end customers for the long haul.
I believe customers with integrated Google Nest product and services will perform well on an attrition basis because the product will be one of the superior ones.
The second benefit, integrated Google Nest services and Google Video services will be available and accelerate go-to-market with a co-branded offering in the second half of 2021 instead of mid-'22.
At a high level, ADT will capture efficiencies as a result while navigating a unique product road map to create differentiation.
Leveraging Google's prowess in machine learning and Artificial intelligence to fuel what Google calls ambient computing is the next-gen of home security solutions.
In computing, ambient intelligence (AmI) refers to electronic environments that are sensitive and responsive to the presence of people. Ambient intelligence was a projection on the future of consumer electronics, telecommunications, and computing that was originally developed in the late 1990s by Eli Zelkha and his team at Palo Alto Ventures for the time frame 2010–2020.
And if you can imagine for a moment, in today's world, to leverage this machine learning supported system in different ways with rules and automation, this will only increase the prestige and revenue drivers of ADT’s brand.
Another positive data point was the attrition rate, a record low 12.9% that was widespread across geographies, all categories, across all business areas. SMB was flat but residential and core commercial improved.
As 2021 plays out, I believe a combination of positive macroeconomic and macro-environmental factors will stick with ADT helping to continue to drive improvements in the business through the uncertainty of the end of the health crisis and beyond.
Although I wouldn’t put my life savings into ADT, it is worth a flier at $9 today.
Mad Hedge Technology Letter
December 13, 2019
Fiat Lux
Featured Trade:
(WHY THE FANGS ARE BREAKING INTO YOUR HOME)
(GOOGL), (AAPL), (AMZN), (ALRM), (ADT), (ARLO), (RESI), (PANW), (CRWD), (FTNT), (CSCO), (CMCSA), (BBY)
The house is the new smartphone and I will tell you why.
The projected market growth of 18% in smart home technology sales according to Acumen Researching and Consulting will deliver opportunities to shape and prioritize this sector.
The revenues up for grabs from the smart home mean that internet of things’ (IoT) companies will create systems that mesh together with the bare minimum human participation, meaning that tech will have a dramatic influence in our daily lives.
I get several moans and groans a day that the Mad Hedge Technology Letter only shines the spotlight on the FANGs.
But it is hard not to when it comes to the future of the home.
Just look at recent M&A activity.
Automation and connected smart appliances have consumed Amazon by recently acquiring Eero, producer of routers for apartments, houses, and multi-story homes, and after already paying $1 billion to acquire Ring, a doorbell-camera startup. It had also bought Blink, a smart camera maker in 2017.
Google hasn’t shied away either by investing in smart home products pocketing Nest, a firm producing smart home products, for $3.2 billion.
Nest took a few years to sort out its production phase but finally managed to launch new temperature sensors, a video doorbell, and an outdoor smart camera.
What are the trending IoT products now?
The flavors of the day are smart lights, security, entertainment systems, and temperature control.
They are the low hanging fruit of the smart home industry – a de facto gateway into this world.
Most of these smart devices operate with voice assistants, but because of the nature of competition, certain products are aligned with certain ecosystems and compatibility issues will persist until the competition flushes itself out.
A layman’s example would be Apple’s Homekit dovetailing nicely with Apple’s Siri.
Companies are in the first innings of the product iteration cycle and the variations of smart home products are endless stemming from showers that remember preferred water temperature and flow rates or climate-control systems that change in real-time to suit the user.
Security of home networks and connected devices are still a controversial question mark because the receiver of this type of data has the keys to the most intimate details of personal lives.
Even avid technologists are hesitant to dive in and put up smart home products all over the house, and most are being cautious.
In fact, privacy issues are the most distinct headwind to fresh adoption rates.
Many people simply aren’t willing to make the jump yet until they are more convinced of its use case.
Even with all the reservations, an alternative global shipment company believes smart home devices will post 24% in growth next year.
For the smart home device believers, this cohort averages 6 smart home devices per household and will certainly rise to 7 or 8 by the end of 2020.
Popular items include the Amazon Echo, Google Home, and Apple (AAPL) HomePod.
Smart speakers are already present in 36% of American homes and rising.
Consumers are also worried about technology invading their daily lives along with allowing artificial intelligence to dominate personal decision making.
Others have concluded that items such as smart microwaves are a waste of money and are unneeded when analog devices function admirably.
Another legitimate reason is that the software and technology involve a perceived steep learning curve to operate which many people do not have the patience for.
And some are just burnt out by the volume of technology thrown in our faces.
Who wants to operate 50 apps on their phone to control their smart home devices when there are other pressing needs in life?
Companies with skin in the game are Alarm.com (ALRM), ADT (ADT), Arlo Technologies (ARLO) and Resideo Technologies (REZI) and they will be outsized winners if they can solve many of the industries lingering issues.
The value thesis in the case of home automation companies is that they are financially efficient, time-effective, boost wellness and will be easy to use.
About 11% of U.S. broadband households have smart thermostats and Nest’s smart thermostat is the most popular.
Networked security cameras by Arlo are in 10% of homes.
Video doorbells from Amazon.com (AMZN), Google are in 8% of homes and help deter theft of e-commerce packages.
Smart light bulbs and lighting are at 8% market share while smart door locks are at 7% penetration.
There are several second derivates bet on this as well.
The most common user interface for the smart home is apps on a smartphone or tablet and voice commands to smart speakers are second.
The conundrum of installation complexities leads to the demand of professional installers.
This demand has delivered opportunities for companies like Comcast's (CMCSA) Xfinity and Vivint.
Electronics retailer Best Buy (BBY) has stepped up its footprint in this market as well.
Another stock play would be cybersecurity companies because they will win contracts protecting the software that smart home products rely on.
Hackers are getting more sophisticated and a private cybersecurity company Firewalla can track where data is flowing to and from your devices.
Firewalla management recommends buying devices from reputable home automation companies like Amazon and Google because they have more accountability and are of higher quality.
There will be a huge onramp of cybersecurity contracts doled out to the likes of Palo Alto Networks, Inc. (PANW), CrowdStrike Holdings, Inc. (CRWD), Fortinet, Inc. (FTNT), and Cisco Systems, Inc. (CSCO).
We are in the first mile of a marathon and smart home product manufacturers, cybersecurity companies, 5G internet, and semiconductor companies will all benefit from the broad-based integration of these next-generation home consumer products.
