SaaS Transition Will Transform Smart Property Technology Prospects

Key Takeaways

• Transitioning to a SaaS-focused model is boosting revenue, margins, and operational efficiency, highlighting future growth potential in smart property technology.
  
• Management's confidence reflected in share repurchase programs and targeted cost reductions will likely enhance margins, cash flow, and earnings per share.
  
• Transitioning to a SaaS model faces execution risks, while demand issues and macroeconomic challenges threaten revenue and profitability at SmartRent.

Catalysts

An enterprise real estate technology company, provides management software and applications to rental property owners and operators, property managers, homebuilders, developers, and residents in the United States and internationally.

• SmartRent is transitioning to a SaaS-focused business model, with SaaS revenue already representing a growing portion of total revenue. This shift is expected to increase both revenue and margins as SaaS typically offers higher recurring revenue streams and profitability compared to hardware.
  
• The company's ARR growth of 17% year-over-year and planned expansion of their SaaS platform through strategic product enhancements suggest a strong potential for future revenue growth. Their focus on operational efficiencies and platform improvements should further enhance net margins.
  
• The substantial growth potential in the largely untapped market of smart property technology, particularly with 50 million potential rental units, provides a long runway for revenue growth as market penetration deepens.
  
• SmartRent's strategic investments to improve their operational processes and cost management, including targeted cost reductions expected to take effect in the second quarter of 2025, are likely to improve net margins and cash flow.
  
• The strategic use of share repurchase programs underscores management’s confidence in the long-term value of the company and can enhance earnings per share as the transition to higher-quality recurring revenue drives growth.

SmartRent Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SmartRent's revenue will grow by 4.3% annually over the next 3 years.
• 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 -39.9% to the average US Electronic industry of 9.0% in 3 years.
• If SmartRent's profit margin were to converge on the industry average, you could expect earnings to reach $16.9 million (and earnings per share of $0.11) by about July 2028, up from $-66.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.4x on those 2028 earnings, up from -2.9x today. This future PE is lower than the current PE for the US Electronic industry at 23.8x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.69%, as per the Simply Wall St company report.

SmartRent Future Earnings Per Share Growth

Risks

• The significant decrease in total revenue by 41% in Q4 2024 and 26% for the full year suggests underlying challenges in demand generation and sales activation, impacting overall earnings and posing a risk to future revenue growth.
  
• The poor performance of the channel partner sales program and its subsequent unwinding highlights execution risks and has resulted in reduced volumes of new units shipped, potentially affecting both revenue and net margins due to an over-reliance on hardware sales in the past.
  
• Macroeconomic uncertainties and challenges relating to tariff policy changes on the hardware supply chain could result in cost pressures, affecting net margins and profitability.
  
• The strategic transformation toward a SaaS-focused business model is still in its early stages, and any delays or failures in execution could prolong the period of operating losses and cash burn, impacting net earnings and cash flow.
  
• The company's reliance on large multifamily operators may present concentration risks, and prolonged capital expenditure decision cycles among these clients could limit revenue growth and hinder market expansion efforts in mid-market segments.

Valuation

• The analysts have a consensus price target of $1.65 for SmartRent based on their expectations of its future earnings growth, profit margins and other risk factors. 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 $1.3.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $187.9 million, earnings will come to $16.9 million, and it would be trading on a PE ratio of 18.4x, assuming you use a discount rate of 7.7%.
• Given the current share price of $1.02, the analyst price target of $1.65 is 38.2% 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.