Investing in Home Automation with Control4
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In a recent article, we highlighted an “Internet of Things” IPO from Alarm.com (NASDAQ:ALRM), a company that is offering a full spectrum of home automation solutions along with a “cloud” offering to boot. According to a recent report by Transparency Market Research, the global home automation market was valued at US$4.41 billion in 2014, and is expected to grow at a CAGR of +26.3% from 2014 to 2020. Alarm.com shows revenue growth that exceeds this estimate with revenue growing at a CAGR of +37% over the past 4 years. Alarm.com (NASDAQ:ALRM) isn’t the only publicly traded play in this space though. Another pure play on home automation is Control4 (NASDAQ:CTRL).
Founded in 2003, Control4 is a “leading provider of automation and control solutions for the connected home”. At the center of their solution is an advanced software platform, which they provide through their products and which interfaces with thousands of connected devices that are developed by Control4 and by third parties. The products run the gamut from home controllers, HD video intercoms, and wireless thermostats to wall-mounted control tablets such as the one seen below which allow you to control all aspects of your home:
When looking at the Control4 business model, there’s one distinct difference from Alarm.com’s business model that stands out immediately. Control4 has little recurring revenue or backlog. Their revenue is generated from orders of their solutions from new and existing consumers. Alarm.com, on the other hand, is pursuing a subscription model based on their “cloud” platform which currently constitutes +69% of their total revenues, a proportion that continues to grow. If all home automation devices begin to use their cloud, Alarm.com doesn’t have to worry if a competitor has a better piece of hardware. Control4, on the other hand, has to keep developing better home automation hardware and selling it. Here’s a look at the revenue growth over the past 4 years for both these companies side by side:
Control4’s yearly revenue growth is slowing with 2014 revenues at $149 million up +16% from the year prior. Compare this to Alarm.com with $167 million in 2014 revenues up +28% from the year prior. Q1-2015 revenues for Control4 were less than the same quarter in the year prior, with the company actually reporting a loss for the quarter. Investors have punished the stock as a result with CTRL losing -51% year-to-date.
Another concern with Control4 is that in the past two years, 3 companies have notified the Company of possible patent violations. 2 of the companies, Nokia and Certified Measurement, have not yet initiated litigation yet but Intuitive Building Controls has. Since their IPO in August 2013, CTRL shares are down -62% and hitting new all-time lows as recent as last week. So is Control4 a good way to invest in home automation? It’s certainly a pure play on the theme but Alarm.com seems to be building a much better moat with their cloud platform. Investors who might see some value in Control4 could create a “Home Automation Motif”, weight the two companies by market cap, and then invest in both as seen below:
While this motif would predominantly be an investment in ALRM at an 80% weighting, you would still get some exposure to CTRL in case the company turns around their revenue growth or is acquired. At the moment this seems like a much better way to invest in home automation than entering into a single position in CTRL. We’ll be looking forward to seeing just what sort of results CTRL announces in Q2-2015 which should give investors some guidance as to whether or not the revenue growth problems are temporary or instead, a symptom of a much more serious problem.
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