We recently did a deep dive into a fast-growing telehealth company that’s trying to become the go-to platform that employers use to cut healthcare costs by emphasizing things like primary care video visits. There’s quite a scramble to grab market share in digital healthcare, including from Amazon, though the e-commerce giant hasn’t quite conquered the market like it has in other technology sectors.
Take the $113 billion smart home market (an estimate attributed to data research firm IDC). It’s been a short eight years since Amazon introduced its
deep-state surveillance device smart speaker and its ubiquitous voice assistant. Today, Alexa is connected to some 300 million devices and is compatible with about 140,000 different smart products, CNBC recently reported. Some of the most popular, of course, include the Echo and the smart camera line from Ring, which Amazon acquired for $1 billion in 2018. It may soon add iRobot (IRBT) to its portfolio of smart home devices, if it can overcome skepticism by the Federal Trade Commission and general privacy paranoia. (Between a flying security camera and an all-seeing vacuum cleaner, what’s the big fuss about?) Despite the gaudy numbers, the company’s grip is slipping over time, at least as measured by the smart speaker market.
It’s not easy to maintain market leadership, especially in the dynamic consumer tech product market. It’s a bit easier in the B2B space because once a customer has committed millions of dollars to a particular technology – like genetic sequencing hardware or surgical robotics – it’s more difficult and expensive to justify buying the newest toy. So let’s look at the self-described market leader in the enterprise smart home solutions industry, SmartRent (SMRT), a five-year-old IoT company based outside of Phoenix, Arizona.
About SmartRent Stock
SmartRent specializes in smart home and smart building automation for residents, property owners, managers, developers, and homebuilders. Its sweet spot is large multifamily residential owners that use its IoT platform to automate access control for buildings, parking management, asset monitoring (think leak sensors and connected thermostats), as well as provide virtual property tours, WiFi, and more. The company had raised about $100 million before it merged last year with a special purpose acquisition company (SPAC), one of more than 600 backdoor deals to the public markets last year. Remember those?
SmartRent benefited from closing its deal before institutional investors started getting nervous about SPACs, so it took home about $450 million in cash, which included $155 million in additional private equity investments by the likes of home construction company Lennar and Koch Real Estate Investments, among other notable names. In August 2021, the newly cashed-up company premiered with a market cap of $2.2 billion. Today, SmartRent stock is down 80% with a market cap of about $500 million. We’ll dive into the reasons for the SmartRent stock dive momentarily. First, let’s understand a bit more about the business.
SmartRent Business Model
SmartRent touts what it calls a “curb to couch,” which sounds like how we picked up our last piece of furniture. Whatever the name, the business model involves selling hardware and software solutions where an entire residential property uses SmartRent’s proprietary hardware, as well as third-party smart home devices. It’s all remotely managed using the company’s smart home operating system, Community Manager, and software through a central-connected device called Smart Hub. For instance, a typical SmartRent rental unit or rental home may come with a Smart Hub, smart locks, thermostat, and leak sensors.
The system is also hardware agnostic, so residents can use their own favorite devices like IoT sex toys. “Alexa, turn on …” Everything is linked and managed in the cloud, including other applications like access control and parking and integrates into “most” existing property management systems used by the industry.
How SmartRent Generates Value
SmartRent claims that its customers can realize a 50% return on investment over a three-year period after the company’s smart home operating system. Here are a few ways the systems shaves costs:
- Save about 20% to 30% on utilities by using smart thermostats, smart lights, and leak sensors.
- In addition to utilities, those same leak sensors can help decrease expenses associated with water damage and insurance between 70% and 90%.
- Up to a 50% reduction in leasing and re-leasing costs through what would seem to be difficult-to-quantify metrics based on streamlining processes associated with touring properties, onboarding residents, and customer service. For example, prospective residents can tour the property virtually at any time, freeing property management staff to attend to value-added tasks like installing smart cameras in bathrooms. And no more need to help a drunk resident who lost his keys in the bushes get back into an apartment.
- Finally, there’s the cool factor. SmartRent estimates that multifamily rental owners may be able to increase rental rates by approximately $25 to $100 per rental unit per month because of the “differentiated resident experience and strong demand for smart communities.
Frankly, some of these numbers seem a little absurd, perhaps based on the absolutely best-case scenario for all eternity. The last, for instance, works out to be $400 to $1,200 in rental increases per year. Sure, the rental market is equally absurd, but not that crazy – and certainly not over a sustained period of time. Last year, rental price increases peaked at nearly 18%, which would be $360 for a $2,000 unit. Growth in rent prices is now about 7.5% from a year ago, according to national rental data from Apartment List.
This begs the question of how SmartRent measures success.
Key Operating Metrics for SmartRent Stock
SmartRent claims to be an enterprise software company, but it would be more accurate to say that it aspires to be an enterprise software company. Most of its revenues still come from selling hardware and providing professional services, which involve training, installation, and other customer support services. What the company calls Hosted Services account for all of the recurring revenues. These consist of its software as a solution (SaaS) offering and what amounts to renting a Smart Hub over a 48-month period. The company claims most of its customers sign five- or six-year contracts (its SEC filings report both numbers in two different paragraphs).
While recurring revenues are going up, driven by SaaS subscriptions, the growth isn’t organic. Rather, it’s entirely based on two recent acquisitions to expand SmartRent’s property management software offerings, as well as its customer base. iQuue is a smart apartment management company that offers access control, door code management, managed WiFi, battery management, and professional installation. The acquisition came with 19 new customers in the Northeast, with iQuue tech running in 22,000 units. SightPlan offers a real estate operating platform that automates everything from communications to maintenance workflow and inspections. Together, the two companies accounted for nearly half of the SaaS growth in the most recent quarter.
SmartRent’s four other key metrics all revolve around how many of its SmartHubs have been deployed (current and new), committed, and booked. Committed refers to all potential future Smart Hub deployments, while booked is a subset that represents the actual number that have a binding contract attached. In other words, most of the key metrics are related to recurring hardware and sounds like an overly cooked way of measuring success in one category.
This is the sort of sloppy spin that we saw from SPACs all the time during their short-lived heyday. You might guess the answer to this next question.
Should You Buy SmartRent Stock?
We don’t give you advice; we give you analysis. Post-SPACs like SmartRent need to get smart about delivering on their promises. For instance, SmartRent estimated 2021 revenues of $119 million but fell short at $110 million. The company revised its guidance for 2022 with total revenue of $155 to $180 million compared to previous guidance of $220 to $250 million. But if you go back to the SPAC investor deck, you’ll see SmartRent originally promised revenue of $342 million this year – or about half of the midpoint of the latest guidance range. You’ll read about supply chain woes and record backlogs – legit problems – but management teams need to be held accountable for drastically missing their SPAC deck guidance.
Another red flag is customer concentration. Two of its biggest customers accounted for nearly 25% of revenues last year. They also happen to be limited partners of an investor in SmartRent, with more than 20% ownership in the company. The company must also prove that it can integrate its new acquisitions and cross-sell solutions to those customers.
SmartRent says its total addressable market is somewhere north of $200 billion, but that number represents the global opportunity and SmartRent is still very much domestic, with a few pilot programs in the United Kingdom, Canada, the Netherlands, and Ireland. In addition, the number assumes growth beyond real estate to other commercial real estate asset classes, including offices, hotels, retail, industrial, and self-storage. It sounds like a big ocean of opportunity, and SmartRent has about 2.5 years runway based on the current rate of losses (about $25 million per quarter) and $263 million in cash.
We haven’t said much about competition, which SmartRent claims is fragmented. Thus, it has anointed itself the market leader in enterprise smart home solutions. It is worth noting that Amazon has its own commercial IoT platform available on Amazon Web Services, though it’s not clear how aggressively the e-commerce company is pushing into the B2B market. It certainly has the infrastructure to compete against a niche player like SmartRent.
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