Snap One: Solid Fundamentals, But No Near-Term Catalyst (NASDAQ:SNPO)

Overview

Snap One (NASDAQ:SNPO) is a leading innovator in the market for smart homes and businesses, offering a full spectrum of software solutions to integrators and end users. The growing popularity of connected technologies is driving growth in this market, and SNPO is well-positioned to capitalize on this trend with over 2,000 unique SKUs available. SNPO’s success is driven by its scale and ongoing partnerships with integrators, which allow the company to respond to changing consumer demands and continually innovate in its go-to-market strategy, products, and technology-enabled workflow solutions.

However, the lack of near-term catalysts and an expected slowdown in FY23 are key concerns on the stock level. Hence, I am recommending to stay neutral on this until things turn for the better.

Business description

Snap One is a leading innovator on a global scale in the market for smart homes and businesses.

The world is becoming more connected

Technology has allowed us to become more interdependent, and this has changed the way we do nearly everything. Connected technologies are constantly improving and becoming more user-friendly, allowing for new and exciting possibilities for homeowners and businesses. As a result of this increased availability and popularity, consumers are now faced with a bewildering array of options when attempting to piece together the experiences they want.

Increases in the availability of high-speed internet, as well as the popularity of smart connected gadgets, streaming platforms, smart speakers, and streamlined control experiences, will likely lead to continued growth in the market for smart home solutions, in my opinion. The introduction of creative and inexpensive point devices from industry giants like Alphabet (GOOG) (GOOGL) and Amazon (AMZN) has increased interest in smart-devices and widened access to entry-level smart living experiences. It’s no longer sufficient to merely want a volume knob on your TV; you now expect it to actively respond to your requests. As the number of smart homes in the United States continues to grow (68 percent by 2027, per Statista’s projections), I anticipate an uptick in customer demand for more sophisticated setups.

SNPO end-to-end ecosystem

SNPO provides integrators with a suite of software solutions for enhancing the smart home experience for end users. SNPO is a one-stop-shop for both system integrators and end users, as its core products contain all of the design elements needed to construct easy-to-install and manage smart home systems. In my opinion, no other company comes close to matching SNPO’s ability to embed a whole portfolio of products, technology, and digital capabilities within an integrator’s workflow. Put another way, SNPO makes it easier for integrators to come up with optimal, useful, and efficient solutions to the problems inherent in developing a smart home system.

Over 2,000 unique SKUs have been developed by SNPO to address the full range of problems that must be addressed in order to provide seamless smart home solutions. Snap One is the only place to get your hands on these devices and software, and they also sell them at secret wholesale pricing under own brands. I believe this strategy works in favour for integrators as it provides flexibility in terms of optimizing for the best profitability depending on their cost structure. Not only are SNPO solutions extremely customizable, but they also come with helpful management capabilities that simplifies operation workflow processes for integrators to offer vital post-installation assistance.

Other than that, I think interoperability is quite important. In today’s world, shoppers have access to a wide variety of goods and services from a wide variety of providers, and they routinely combine products from different companies to find the perfect combination for their needs. I think SNPO did a great job in this area. Users may enjoy and control their Snap One system with the familiar products and devices they already own because to SNPO’s compatibility with the tens of thousands of items made by hundreds of third-party manufacturers.

Strong flywheel effect

In my opinion, SNPO’s success stems from the company’s scale and its consistent, ongoing, and multi-tiered partnerships with integrators. I think it’s crucial, given the fluidity of consumer tastes, that SNPO maintains strong relationships with integrators so that it can stay abreast of and respond to the changing demands of both integrators and end users. I believe that SNPO’s commitment to its go-to-market strategy, product innovation, and innovative technology-enabled workflow solutions is a direct result of the scale and intelligence gained from these partnerships.

As a result, this creates a self-sustaining flywheel that drives SNPO’s recurring revenue and expansion. The integrator gains efficacy thanks to SNPO innovation, while end users benefit from better solutions and enhanced experiences. Since integrators keep coming back to SNPO for all their smart home project needs, this speeds up industry acceptance, which in turn leads to great growth for SNPO.

Omni-channel strategy

SNPO’s model is predicated on a customer-centric, digital sales approach. Integrators can do research, develop projects, get training, place orders, and get continuous support all through their comprehensive e-commerce portal. Their web store is backed up by a countrywide system of offices and warehouses. It is far more challenging to create a local presence since it takes time to build relationships and hire the proper individuals, while it is easy to scale a digital presence (i.e., deploy marketing budget on the right sites). In my opinion, SNPO’s strategy would benefit greatly from establishing a local branch, as this would allow them to better serve local integrators by making products available on short notice and giving them a physical location in which to conduct relationship-building, training, and product demonstration activities. Integrators, in my opinion, are more committed to SNPO because of the relationships and local assistance it offers them.

SNPO is founded by integrators

The fact that it was started by integrators is a major selling point for SNPO. Thus, the integrator is prioritized throughout the development of the platform, which aims to streamline the integrator’s product acquisition process and supply them with tech-enabled tools and support services to better manage their businesses. In my opinion, no other company in its field offers the breadth of products that SNPO does, nor the depth of technological solutions that aid the integrator’s process. For instance, Snap One represents over 20% of the domestic DIFM market and is a crucial business partner for professional integrators (according to the S-1).

Forecast

Although I believe the long-term trend for SNPO is positive, there are significant short-term headwinds. The global macro-slowdown will have a direct impact on SNPO in FY23 as consumers reduce discretionary spending, and as a result, I expect revenue to fall. In FY24, I anticipate that growth will return to positive territory.

SNPO is currently trading at 9 times forward EBITDA, which is lower than the average of 12.6 times. I believe there is no obvious near-term catalyst that would push valuations back to their average, so it should trade around this level for some time. With these assumptions, I believe SNPO is not currently a compelling investment opportunity.

Key risks

Competitive market

SNPO faces price-based competition in its target markets, which could have an impact on the company’s average selling price and profit margins. In addition, there is a lot of competition in the security and commercial markets today, where SNPO has a smaller share.

Business model is dependent on integrators

Snap One operates as a business-to-business-to-consumer firm dependent on the systems integrator sector of the industry. The company must maintain integrator engagement on the platform with suitable incentives, ease of use, and a high level of customer satisfaction.

Conclusion

SNPO is poised to capitalize on the rising demand for connected technologies. SNPO’s ability to adapt to shifting consumer preferences and innovate its go-to-market strategy, product lineup, and technology-enabled workflow solutions is the driving force behind the company’s success and growth.

However, key concerns on the stock level include the absence of near-term catalysts and an expected slowdown in FY23. That’s why I think it’s best to take a wait-and-see approach until the situation improves.