SMRT - SmartRent: Heading In The Right Direction

2023-11-01 14:43:29 ET

Summary

• Today, we take an updated look at SmartRent, Inc., a company that offers building hardware and cloud-based software solutions for rental property owners and operators.
• The company is delivering solid revenue growth, has a rock-solid balance sheet, and is moving toward profitability.
• An updated analysis follows in the paragraphs below.

Common sense is instinct. Enough of it is genius ." -George Bernard Shaw.

Today, we are revisiting SmartRent, Inc. ( SMRT ) for the first time since our initial article on this small-cap " Busted IPO" back in June of 2022. At that time, the recommendation was no better than a small "watch item" holding for aggressive investors given we were in the early stages of a significant monetary tightening. The real estate market has become even more increasingly challenging since then as mortgage rates have touched 8% for the first time since this beginning of the century. How has the company managed its business given these increasing headwinds? An updated analysis follows below.

Company Overview:

SmartRent, Inc. is headquartered in Scottsdale, AZ. The company offers building hardware and cloud-based software-as-a-service solutions. The platform is designed to enhance visibility and control over real estate assets to rental property owners and operators, property managers, homebuilders, developers, and residents.

These solutions also deliver cost savings and additional capabilities through all-in-one home control offerings. SmartRent serves over 500 rental communities and 15 of the top 20 multifamily owners and operators. The stock currently trades just below $2.50 a share and sports an approximate market capitalization of $480 million.

SmartRent sells both third-party hardware devices and software that generates recurring revenue via monthly monitoring. It has over 600,000 devices installed. The company has three business divisions: Hardware, Professional Services (primarily installation) and Hosted Services (SaaS or subscription services)

Second Quarter Results :

The company posted second quarter numbers on August 8th. SmartRent had a GAAP net loss of a nickel a share, in line with the consensus. Revenues rose just under 26% on a year-over-year basis to $53.4 million, just a tad under expectations. The company deployed some 48,000 units in the quarter, pushing its total installed base to just past 650,000.

Total operating expenses fell to $22 million in the second quarter compared to $28 million in the same period a year ago. Adjusted EBITDA also improved to a negative $6.4 million in the quarter versus negative $8.5 million in 1Q2023 and $13.4 million. Leadership believes adjusted EBITDA will be positive in Q4 of this year. Based on results, management lifted the floor of its FY2023 revenue guidance just slightly.

Analyst Commentary & Balance Sheet:

Since second quarter results were posted, four analyst firms including KBW and Cantor Fitzgerald have reiterated Buy ratings on the stock. Price targets proffered have been in a tight range of $4.50 to $5.00 a share. Morgan Stanley has maintained an Equal Weight rating on the stock with a $3.40 price target. Bleeker Street Research initiated a short call against the equity one month after second quarter results came across the wires based on the thesis that SmartRent's smart locks may have security issues.

Nearly nine percent of the outstanding float in the shares are currently held short. Two insiders sold nearly $300,000 worth of stock collectively in May and June. That has been the only insider activity in the stock so far in 2023. The company ended the first half of 2023 with just over $195 million in cash and marketable securities on its balance sheet against no long-term debt. SmartRent also has a $75 million credit facility with nothing drawn against it.

The company's recent preferred distribution deal with ADI Global should reduce inventory and improve cash flow in the quarters ahead. The agreement was signed in August and the company ended the first half of 2023 with approximately $60 million in inventory. Cash burn in the second quarter was $7 million, a significant improvement from the average $20 million quarterly cash burn rate in FY2022.

Verdict:

SmartRent, Inc. lost 49 cents a share in FY2022 on just under $168 million of revenue. The current analyst firm consensus has SmartRent posting a loss of just 18 cents a share as sales rise sharply to nearly $242 million. In FY2024, they see the company breaking even as sales rise just over 30%.

SmartRent seems heading in the right direction. Management stated it projected the company would generate positive cash flow at some point in 2024 on its second quarter earnings conference call . I am adding a tad to my existing holding in SMRT to average down somewhat.

If I was more confident in the direction of the U.S. economy, I would be more aggressive in building a position in SmartRent, Inc. However, given my view that recession is highly likely in 2024, the stock only merits a " watch item" position for now even as we continue to monitor this evolving story.

It is a thousand times better to have common sense without education than to have education without common sense. " -Robert Green Ingersoll.

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