Snap One: Smarter Homes, Smarter Investment?
- Snap One has gone public in an offering which was not well received by the market, after pricing was quite soft already.
- The company is well positioned and plays a consolidating role in distributing and developing smarter home technological products.
- The potential is there, but there are some execution and competitive risks as well.
- Following a lackluster public offering, valuation multiples are still quite reasonable, as I look forward to learning more about the numbers in the quarters to come.
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Snap One (NASDAQ:SNPO) has gone public in an offering which was not a major success, as investors are apparently not yet convinced about the underlying quality, growth and potential of the business. While I have some questions about the pace of growth as well, I like the potential of the business at the same time, making me an avid follower of the shares in the quarters to come.
Snap One aims to power smart living by integrators, for integrators. The company powers smart living solutions which allow professional integrators to deliver seamless experiences in connected homes and small businesses.
With the "Only Here" strategy, the company is connecting currently some 16,000 professional integrators which have employed solutions in nearly 350,000 homes and businesses as of the end of the first quarter of this year.
With technology increasing in every part of our lives, the home is seeing accelerated investments into smart living, working and playing. While the promise is that these solutions should make life easier, it is the very fragmented nature of solutions by multiple suppliers which actually makes lives more complicated. With complexity increasing, consumers resort to professionals to install these solutions for them, certainly if they can integrate multiple technologies as well.
Snap One is a distributor of integrators, as these professionals have access to 2,800 SKUs, in a one-stop solution, with the vast majority of sales derived from proprietary products. The company is currently owned by private equity firm Hellman & Friedman which has played a role in the consolidation efforts of the business in recent years. A major role in this was the 2019 purchase of Control4, a formerly publicly listed business in a deal valued at $680 million which closed in the second half of 2019.
Valuation & Public Offering Thoughts
Management and underwriters of Snap One aimed to sell over 13.8 million shares in a preliminary price range between $18 and $21 per share, with pricing set at the lower end of the pricing range. This means that the company will raise $248 million in gross proceeds with the offering, with net proceeds pegged around $225 million.
With net debt reported at $616 million before the offering proceeds are factored in, net debt is seen around $400 million. Together with the 75 million shares outstanding, equity of the company is valued at $1.35 billion, for a $1.75 billion enterprise valuation if the net debt load is included.
The company has seen rapid growth in recent times. The company generated $590 million in sales in 2019 on which a $14 million operating loss was reported. Sales rose 38% in 2020 to $814 million, as the operating losses of $14 million turned into a similar $14 million profit the year thereafter.
First quarter sales growth slowed down to 27% with revenues of $220 million running at a run rate of $880 million. The slower percentage growth rate is noteworthy as the company was up against easier comparables in the year before when sales were impacted by the emerging pandemic at the time. A quarterly operating income of $2 million and change looked modest, but was up $12 million from the year before.
For the second quarter, the company guided for sales around $251 million, running at a rate of a billion already. Growth improved to 33%, but again, this is more the result of the weaker sales reported in the second quarter of 2020, when the pandemic was in full swing. Worrisome is that EBITDA is seen around a midpoint of $28 million, just a modest improvement from a $23 million and change number posted in the first quarter of 2021.
With revenues trending at a billion a year, the company is valued at just around 1.7 times sales. Margins are a bit complicated as the company posted $94 million in EBITDA in 2020 and adjusted net income of $28 million. With EBITDA and adjusted earnings trending $30 million a year higher at the moment on an annualized basis vs the year before, leverage ratios fall to roughly 3 times based on the EBITDA. Believing adjusted earnings could now trend at $60 million, valuations are high but perhaps reasonable in their mid-twenties.
Valuation discussions above remain intact as the company has not seen a change in the share price after the offering, with shares tied to the offer price.
The company has played the role of consolidator in a growing industry which looks compelling, but peers are stepping up their game as well, including many of the largest technology names and adjacent players like ADT as well, among others.
While the role and competitive power of a distributor can always be questioned to some degree, it is the fact that the company has such big ties with so many integrators, and such a large proprietary product portfolio, which is comforting. This insulates the company quite a bit from competition. On the other hand, slim margins are always a big risk, certainly if sales trends do not materialize as expected, as there is still some leverage apparent on the balance sheet.
Other risks include that of a superior competitive product offering (which makes it easier to integrate even more products) as such development involves large software development component as well. A near-term risk is that of component shortages, impacting pretty much all manufacturers at this point in time, hopefully, and likely a transient factor.
While there are some questions, the overall valuation looks perhaps somewhat reasonable given the growth profile. While the company might create value through continued M&A in this secular growth play, there is a chance that the business might become a target itself.
All of this results in the overall valuation and investment case looking quite reasonable, albeit it is hard to see what the current growth rates are, with revenue growth trends impacted in a big way through historical M&A activities. Hence, I look forward to growth trends in the quarters to come, before establishing a more definitive investment case.
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