CE Pro magazine is a leading trade publication for the custom electronics business. Its readers include homebuilders, small- and medium-sized businesses, and individual homeowners.
On Jan. 2, CE Pro’s editor-in-chief, Arlen Schweiger, summarized the year for the 55 smart home stocks that are part of the publication’s Smart Home Stock Index. The index rebounded nicely in 2023 with solid performances from many components, including four of the Magnificent 7. According to Schweiger, 80% of the components in the index produced positive returns for their shareholders in the past year.
Many names aren’t pure-play smart home stocks, possessing operations in other areas and industries. For example, Amazon (NASDAQ:AMZN) has smart home products such as Alexa, Fire TV Cube, Fire TV Stick, Ring smart home doorbells and thermostats, while it also owns MGM Studios, Whole Foods and many others.
Who will be the big winner amongst smart home stocks in 2024? Here are three names I’m thinking about.
NRG Energy (NRG)
As I said in the intro, there aren’t many pure-play smart home stocks. Although NRG Energy (NYSE:NRG) is a major utility, it makes the index because of its 2023 acquisition of Vivint Smart Home Inc. for an enterprise value of $5.2 billion, approximately 6.3x the pure play’s adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).
Vivint’s smart home platform brought nearly two million customers who used its various products and services, including security systems, security cameras, doorbell cameras, smart thermostats, etc.
In the quarter ended Sept. 30, 2023, Vivint generated $478 million in revenue, accounting for more than 6% of NRG’s overall revenue. In the nine months, it was $1.07 billion, or 5.1% of NRG’s $20.9 billion. However, the nine months is only six months of actual results because NRG acquired Vivint on March 10, 2023, which accounted for nearly 8% overall.
With the addition of Vivint’s two million customers, NRG will be able to cross-sell to all 7.4 million of its customers in 2024 and beyond, providing more predictable earnings through Vivint’s subscription-based business model.
NRG stock is up 62% over the past year, trading within a few pennies of its all-time high of $52.16 as of this writing.
Allegion (ALLE)
Allegion (NYSE:ALLE) describes itself as “a pure-play global provider of security products and solutions,” its website states. As part of its business, it provides Internet of Things (IoT), new technology, and electronic solutions for its customers from 29 production facilities in the U.S., Mexico and several other countries.
It has two operating segments: Allegion Americas and Allegion International. Its brands include Schlage, Kryptonite, Von Duprin, Stanley Access Technologies, Steelcraft and Yonomi.
An example of what it does in the Smart Home segment is the products sold by its Stanley Access Technologies division, which it acquired in July 2022 for nearly $1 billion. It bought the unit from Stanley Black & Decker (NYSE:SWK), which provides automated access solutions to the commercial market. It operates under Allegion Americas.
In its Q3 2023, like many businesses, volumes were lower, offset by higher prices, leading to flat year-over-year revenue growth combined with higher margins and significant earnings growth.
“Demand for our electronics solutions remains strong. We delivered mid-teens organic growth in electronics and software solutions in the quarter, and we continue to see a long runway for further adoption,” stated CEO John Stone.
As a result of its strong earnings in the quarter, the company raised its adjusted earnings per share guidance for 2023 to $6.85 at the midpoint of its outlook. Its stock trades at less than 18x earnings based on its current share price.
Up less than 50% over the past five years, 2024 could be a breakout year for Allegion.
SmartRent (SMRT)
SmartRent (NYSE:SMRT) provides smart home and smart property solutions for owners of multifamily residential buildings. It serves 15 of the top 20 owners and operators of U.S. multifamily properties.
On Dec. 12, 2023, the company announced that The Towbes Group, a California-based multifamily investor and property manager, will roll out SmartRent’s access control and IoT solutions at 2,500 apartment homes owned by Towbes.
“SmartRent’s fully customizable IoT systems enable operators to capture the intrinsic NOI of each asset. Community-specific IoT is essential to seamless operations, energy savings and property protection,” stated its December press release.
While there is no question that this type of technology is necessary for large owners of multifamily real estate, the collapse of its share price over the past five years would suggest that its business has deteriorated.
However, revenue growth isn’t the problem. In 2023, revenues are expected to increase by nearly 40%, raising the number of rental units using SmartRent to more than 680,000.
The problem is its profitability or lack thereof.
In the first nine months of 2023, it expects adjusted EBITDA of $19.9 million, on $176.6 million in revenue, down from a $60.6 million adjusted EBITDA loss of $60.6 million a year earlier. It is projecting adjusted EBITDA profitability in Q4 2023.
With the company likely to be free cash flow positive in 2024, now would be a good time for aggressive investors to consider investing in this smart home pure play.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
