Hardware And Sales Execution Headwinds Will Challenge IoT Expansion Yet Ultimately Support Long Term Potential

Catalysts

About SmartRent

SmartRent provides IoT powered smart home and property management solutions for rental housing owners and operators.

What are the underlying business or industry changes driving this perspective?

• Although connected devices in rental housing keep expanding and SmartRent already has smart hubs connected to more than 3 million devices, reliance on hardware sales that were down 18% year over year and subject to product mix risk could limit how much this installed base translates into higher revenue and stable gross margins.
• While SmartRent is working to convert the 85% untapped units within existing customer portfolios, the need to double the on staff sales team and ramp new enterprise reps points to execution risk that could weigh on ARR growth and delay improvement in earnings.
• Although refresh cycles on aging hardware and early customers approaching end of life deployments can create a recurring hardware revenue stream, the sales capacity consumed by these discussions and potential customer budget constraints may cap the timing and scale of that uplift in total revenue and gross profit.
• While data and AI driven solutions can increase SaaS ARPU and deepen SmartRent’s role in property operations, recent churn in the smart operations solution that reduced SaaS ARPU by about $0.11 per unit highlights that upselling additional software is not guaranteed to translate into sustained ARR growth or stronger net margins.
• Although the company reports structural cost actions, professional services margins improving to about breakeven and two consecutive quarters of positive adjusted EBITDA, the expectation to increase sales and marketing spending to support Vision 2028 could limit further operating margin expansion and delay consistent earnings at the net income level.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on SmartRent compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming SmartRent's revenue will grow by 14.8% annually over the next 3 years.
• The bearish analysts are not forecasting that SmartRent will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate SmartRent's profit margin will increase from -16.6% to the average US Electronic industry of 8.0% in 3 years.
• If SmartRent's profit margin were to converge on the industry average, you could expect earnings to reach $18.0 million (and earnings per share of $0.09) by about May 2029, up from -$24.8 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 22.2x on those 2029 earnings, up from -8.8x today. This future PE is lower than the current PE for the US Electronic industry at 27.7x.
• The bearish analysts expect the number of shares outstanding to grow by 2.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.76%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Core revenue was essentially flat year over year at $36.6 million compared to $36.7 million and total revenue declined 6%. This suggests that if hardware demand remains soft and hub amortization continues to roll off, revenue growth may stay muted and weigh on the long term revenue trajectory.
• Bookings fell 9% year over year to 16,592 units and management highlighted sales capacity being absorbed by contract renewals and hardware refresh discussions. If new enterprise reps and the VAR channel take longer than expected to ramp, the installed base may grow more slowly than planned and pressure future ARR and earnings.
• Hardware revenue declined 18% year over year to $15.4 million and hardware gross margin moved to 18.2%, with product mix and lower volumes cited as drivers. If these trends persist as the installed base matures, hardware could remain a drag on total gross margin and limit improvements in net margins.
• SaaS ARR growth of 9% year over year to $61 million came alongside a sequential decline in SaaS ARPU driven by churn in the smart operations solution that reduced ARPU by about $0.11 per unit. If upselling and renewals do not offset this churn over time, ARR growth and long term net margins could be weaker than expected.
• The company plans to double the on staff sales team and increase sales and marketing spending to support Vision 2028 at the same time as it targets higher profitability and free cash flow. If incremental revenue from these investments does not materialize over the next several years, the result could be sustained net losses and weaker earnings than hoped for.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for SmartRent is $1.5, which represents up to two standard deviations below the consensus price target of $1.75. This valuation is based on what can be assumed as the expectations of SmartRent's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $2.0, and the most bearish reporting a price target of just $1.5.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $226.2 million, earnings will come to $18.0 million, and it would be trading on a PE ratio of 22.2x, assuming you use a discount rate of 8.8%.
• Given the current share price of $1.14, the analyst price target of $1.5 is 24.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.