ADT (NYSE:ADT) stock nearly doubled on Aug. 3 after it signed an alliance with Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), the parent of Google. Under the deal, Google is putting $450 million into ADT stock and $150 million into new products.
The $450 million buys Google a 6.6% stake that values ADT at $6.8 billion. But speculators quickly over-ran that. ADT was still valued at nearly $10.4 billion when trading opened on Aug. 4. The company’s annual dividend of 14 cents per share, which had yielded 1.6%, is now a 1% payout.
ADT’s growth has been slowing over the last year. March revenue was up just 10% from a year earlier. The company is due to report June quarter earnings Aug. 5. Analysts expect a drop in revenue, but decent net income of 27 cents per share.
Google Fouled Its Nest
For Google, the deal is all about Nest.
Originally seen as an “other bet” when it was bought for $3.2 billion in 2014, Nest was absorbed into the main company in 2019. Nest offers smart thermostats, security cameras and a “Nest Hub” that incorporates the Google Assistant.
Folding Nest into the main Google numbers hides the fact that this has been a disastrous move. But Alphabet is not unique in its fumbles. Amazon (NASDAQ:AMZN) paid $1 billion for Ring in 2018, which offers a smart doorbell. Google’s hope is that pushing Nest as a security solution, with ADT, will get Nest products into homes. From there it can presumably add services that broaden its reach.
While the deal boosted ADT stock, it had the opposite effect at Alarm.com (NASDAQ:ALRM). Alarm.com is a cloud-based security company that had been eating ADT’s lunch. Alarm grew 20% last year. Shares fell nearly 20% on Aug. 3, however, cutting its market capitalization to $2.8 billion.
Why Did ADT Sign the Deal?
While Google needs ADT to get Nest into more homes, ADT is seeing competition — not just from wholesalers like Alarm.com — but from Ring and self-installed competitors like SimpliSafe. For full disclosure, I’m a SimpliSafe customer.
Over the last few years, self-installed solutions have been grabbing market share from professionally installed systems like ADT. ADT had one-quarter of the fragmented security market as recently as 2015. It still has the biggest brand name in the business, although its market share has fallen.
ADT itself is nearly 150 years old. The company launched in 1874 as American District Telegraph. It has had central monitoring systems for a century, and an app offering climate control since 2010. ADT’s “Command and Control” panel, launched last year, would presumably be absorbed inside the Nest Hub.
This isn’t ADT’s first foray into higher-tech solutions. It launched a technology partnership with Intel (NASDAQ:INTC) back in 2015. It then bought a self-installed security company called LifeShield last year. This helped it boost annual growth to almost 12% in 2019.
The Bottom Line on ADT Stock
Those expecting a quick payoff, or a quick buyout of ADT by Google, are going to be disappointed. Speculators have already taken the full value of the deal.
ADT is keeping Google at a distance. The shares Google is buying are a special “Class B” issue that don’t let it vote on ADT directors. The $150 million of additional investment is being matched by ADT, which had just $118 million in cash at the end of March.
The bottom line is that Google and ADT are shacking up, not marrying. Both sides can get out of a larger commitment. What’s really at risk here is Nest. ADT may be its last hope of becoming a profit center.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and QCOM.