SmartRent: Leading Player In A Large Industry (NYSE:SMRT)

Summary

I recommend going long SmartRent (NYSE:SMRT). The demand for smart home technology is increasing, however, the market for smart home technology is currently fragmented, with most products being standalone solutions that do not integrate well with others. SMRT offers a different approach, targeting the larger market of preexisting residential properties with its platform-neutral, open-architecture system that can easily integrate with existing hardware and software.

The real estate market represents a significant opportunity for SMRT’s growth and expansion, and the company is well-positioned as a leader in the industry.

Company overview

SmartRent is a software company that offers a smart home operating system for residential property owners, operators, and homebuilders. Their system is fully integrated and can be used by any enterprise, regardless of brand.

More homes are getting digitalized

Smart home technology, in my opinion, is experiencing a boom in popularity thanks to network effects, which is leading to its widespread adoption in both owner-occupied and rental dwellings. Although few places offer it at the moment, I believe more and more people will soon view smart home technology as essential. In fact, tenants will pay a premium for a unit that includes smart home features. Because of this factor, I anticipate a rise in the demand for smart home technology as more property managers and landlords adapt to meet the rising demand for comprehensive smart home solutions. Furthermore, I believe that the same motivating factors apply to other asset classes, which I believe will push up the demand for enterprise-level smart solutions.

Even though there has been a rise in the demand for smart home technology, the market is still quite fragmented, with most products being standalone solutions that cannot integrate well with others. Owners and operators of buildings often have to piece together a modern experience by sourcing smart home technology from a wide variety of disparate point solution providers. This disjointed framework makes it difficult for owners and operators to assess their needs for smart home technology and then source, install, and maintain it.

SMRT competes using a different angle in this large TAM

Many of SMRT’s rivals have traditionally targeted the new construction market, where it is typically simpler to install smart home technology. Also, some of SMRT’s rivals have invested a lot of resources into branded hardware, like smart locks, which have low margins and limit the variety of solutions they can provide.

However, the market for preexisting residential properties is much larger than that for new developments, and I think that’s where SMRT really shines. Moreover, rival firms may offer closed-architecture systems that are incompatible with the hardware and software already in use by owners and operators.

The vast majority of the residential real estate market can be easily targeted by SMRT because of their platform neutrality, open-architecture, and ability to integrate. It is clear from the diagram below that the real estate market represents a sizable and promising target audience for SMRT’s continued expansion. At a revenue of $174 million in FY23E, I believe there is a tremendous amount of room for expansion.

Leading player in the industry

To date, SMRT has established partnerships with well-established residential real estate owners, including 14 of the top 20 multifamily residential owners in the United States. More than 504,000 SMRT devices are already in use across the United States, and another 811,400 have been committed for future use. Clearly, this is a testament to the quality of the SMRT product. As a result of this connection, I believe the business has a significant competitive advantage that discourages new entrants. In addition, SMRT’s growth runway is lengthened because the company can return to the customer and up- and cross-sell additional products.

Real estate owners and managers prefer a unified service for their entire portfolio, which is why SMRT has been so successful. Since the SMRT software is already part of the customer’s property management process, this is especially true when it is being used to manage tens of thousands of units (employees already familiar with the workflow). This makes it a sticky product, and the current market leader [SMRT] is likely to retain and expand its customer base.

SMRT provides compelling value proposition

When it comes to operating systems for smart homes, I think SMRT has created the most scalable and user-friendly one. They provide a complete integrated solution that features both cloud and on-premises components.

• SMRT doesn’t favor any particular brand of hardware, so its solutions work with a wide range of different smart home products, including Google Home and Yale smart locks.
• SMRT uses an open architecture for its software, making it compatible with a wide variety of property management platforms like Yardi and RealPage.
• SMRT makes it simple to get set up because it offers installation services in-house, guaranteeing uniformity of quality and service across markets.

In addition to the labor savings that are immediately apparent, I think the SMRT product has other advantages as well. For instance, floods and other water problems are the leading cause of property damage. If the leak affects multiple stories, the repair costs could be in the thousands. The SMRT basic package includes leak sensors, which are strategically installed in areas (like bathrooms and kitchen sinks) with running water. If a leak is detected, the sensor will immediately alert the building’s maintenance team, who will then work with the affected resident to determine the source of the problem. Early detection of these instances not only prevents hundreds of thousands of dollars in potential damage but also helps reduce the building’s insurance costs.

Added together, I think perks from all ancillary services can add up to significant cost savings for homeowners. In a high-interest rate environment, where building cap rates are rising, these savings are especially significant because increasing a building’s net operating income (homeowners cannot raise rental rates indefinitely, so they need to cut costs) is the primary way to preserve a building’s value.

Establish more partnerships to improve product

If SMRT really wants to perfect its offering, it needs to form more strategic alliances. SMRT’s hardware agnosticism and enterprise software’s seamless integration with most existing property management systems should make for easier partnership formation. By forming alliances with other companies in the software and hardware industries, SMRT will be able to serve a wider variety of communities and customers with tailored solutions. Tools like customer relationship management and property management software are examples of this type of solution. I anticipate that SMRT solutions will further enhance management efficiency and the quality of the user experience by facilitating these partnerships and software integrations.

Delayed ARPU effect

It can take a few years for SMRT customers to complete their roll-out plans, so any increase in average revenue per user [ARPU] will be spread out over a larger number of customers. Since it is counterintuitive to manage 2 or more operating systems, it is also unlikely that existing customers will stop deploying midway. As was previously mentioned, SMRT has 811K units with firm commitments for deployment. When added to the 504,000 units that have already been deployed, that totals a virtually assured 1.3 million units.

Lastly, I anticipate that the long-tail of consumers will contribute to the remainder of the unit growth. It seems to me that SMRT is beginning to tap into this market, as the recent uptick in ridership is indicative of this (number of customers grew from 249 customers to 502 customers). These new customers should follow the same cohort curve as existing customers, and as such, we should have a clear visibility into growth.

Valuation

I believe SMRT has 34% upside based on my model. In the overall scheme of things, based on the stock price decline, a 34% upside is simply back to where the stock traded in late 2022.

The key assumption here is that SMRT can continue to grow at a rapid rate through continuous deployment of its solution through existing customer base and committed units. I believe SMRT can execute this well, and with the current forward revenue valuation, the stock is worth $3.66 in FY23.

Risks

Competition

Rather than other similar products, I see RealPage and Yarti as SMRT’s biggest competitors. They’ve already established connections with all the major players, and their product is more essential to daily operations. In theory, it wouldn’t be hard for them to buy a competing product and include it in their suite of services.

Long road to profitability

SMRT is unlikely to make any profits in the near future. As a result, any new pool of capital flowing into the stock may be discouraged, pushing any value realization far into the future.

Conclusion

SMRT is a software company that provides a smart home operating system to homeowners, property managers, and homebuilders. Smart home technology is becoming more popular as more people see it as essential and are willing to pay a premium for it. The market for smart home technology, on the other hand, is fragmented, with most products being stand-alone solutions that do not integrate well with others. SMRT distinguishes itself by providing a platform-neutral, open-architecture system that can easily integrate with a wide range of hardware and software.