The Contrarian Play

How about a tech contrarian play focused on one of the more primitive areas of technology?

And did I say it’s cheap?

Among the discounted tech equities out there is security specialist, ADT (ADT), that is increasingly using technology as solutions for its customers.

This time, I am talking about normal folks just wanting to live their lives, the collective desires certainly trend towards investors buying security home solutions ADT stock that use technology to protect your home.

Yes, this isn’t a sexy tech stock, but not all are.

And contrary to initial thought, crime has gone down nationally during the pandemic because more people working from home meant less opportunity for trouble to come about the home.

The US set records for decreases in residential burglaries last year, but we all know that it will be different when the freedom of autonomy picks up and we are out of our houses on Friday and Saturday night.

Even in the Great Recession of 2008, crime increased presumably to financial desperation and need.

This sets the stage for ADT to experience more buying as we press into 2021.

What is the bull case as we dig into the weeds?

The ability to get on-premise security solutions today is markedly better than what it was a year ago or the ability three or four months ago.

The strength in execution resulted in ADT finishing Q3 with strong backlogs, the highest of the year.

They had solid sales in install in October as well.

So it's broadly diversified, much of it tied with getting access to the premises.

I’m optimistic about the commercial business with total revenue up sequentially in Q3.

The business includes a largely recurring revenue base of 35%.

It's buoyant and durable, highly diversified stuff. ADT is just shy of 250,000 customers in the commercial business.

There is upside in new and growing verticals, healthcare, education, government, critical infrastructure.

ADT also boasts the best service in the space, and that's the most critical source of differentiation.

Even though the total reported revenue in the quarter was essentially flat year-over-year, 2021 should translate into a “growth” year.

Installation and other revenue increased by $46 million, driven mainly by higher reported residential outright sales revenue resulting from the Defenders acquisition.

This increase was partially offset by lower installation revenue to commercial customers resulting from pandemic-induced economic challenges.

Monitoring and services revenue was up slightly year-over-year.

ADT generated $127 million of adjusted free cash flow during the third quarter. And through the first nine months of 2020, their adjusted free cash flow of $532 million is up more than 15% from the $459 million during the same period in 2019.

The strong year-to-date cash performance comes from a myriad of factors that more than offset the higher cash interest, including subscriber acquisition cost efficiency and the benefits from some favorable cost base trends in the current operating environment, along with some timing items.

First, the new direction with Alarm.com includes the launch of a first-generation ADT + Google offering developed through the commitment by Alarm.com that will result in several tailwinds.

First, it leverages the foundation and extends Command and Control until the end of 2022, and then beyond that, allows that platform to support end customers for the long haul.

I believe customers with integrated Google Nest product and services will perform well on an attrition basis because the product will be one of the superior ones.

The second benefit, integrated Google Nest services and Google Video services will be available and accelerate go-to-market with a co-branded offering in the second half of 2021 instead of mid-'22.

At a high level, ADT will capture efficiencies as a result while navigating a unique product road map to create differentiation.

Leveraging Google's prowess in machine learning and Artificial intelligence to fuel what Google calls ambient computing is the next-gen of home security solutions.

In computing, ambient intelligence (AmI) refers to electronic environments that are sensitive and responsive to the presence of people. Ambient intelligence was a projection on the future of consumer electronics, telecommunications, and computing that was originally developed in the late 1990s by Eli Zelkha and his team at Palo Alto Ventures for the time frame 2010–2020.

And if you can imagine for a moment, in today's world, to leverage this machine learning supported system in different ways with rules and automation, this will only increase the prestige and revenue drivers of ADT’s brand.

Another positive data point was the attrition rate, a record low 12.9% that was widespread across geographies, all categories, across all business areas. SMB was flat but residential and core commercial improved.

As 2021 plays out, I believe a combination of positive macroeconomic and macro-environmental factors will stick with ADT helping to continue to drive improvements in the business through the uncertainty of the end of the health crisis and beyond.

Although I wouldn’t put my life savings into ADT, it is worth a flier at $9 today.