Entering an established market late often seems like a disadvantage, but history shows that being first isn’t always the key to success. 

Google (GOOGL) wasn’t the first search engine; others like Yahoo and AltaVista had already established their presence. 

Yet, the company became the dominant force in search with a 90% market share by refining its algorithm, offering better results, and continuously improving its platform. 

What set Google apart was not just innovation but its ability to learn, adapt, and leverage its strengths to overtake competitors who initially had the lead. 

Companies that enter late can still dominate if they focus on delivering superior value and addressing market gaps.

ADT (ADT) is a leading security company that provides electronic security, fire protection, and related alarm monitoring services to residential and small business customers across the United States.

The company’s offerings include burglar alarms, smart security cameras, fire and smoke detection systems, and access control systems. 

ADT also provides interactive and smart home solutions, allowing customers to monitor and manage their security systems through mobile applications remotely.

Despite cementing its position in professional security solutions, ADT faced challenges entering the do-it-yourself (DIY) security market. This delay left it trailing competitors like Ring and Arlo.

The DIY market represents a significant opportunity for the company. The demand for home security solutions continues to grow, with over half of U.S. households still lacking any security system. 

Consumers are increasingly prioritizing safety due to heightened crime concerns, fueling interest in smart home products such as video doorbells and security cameras. 

The home security market is projected to reach $40 billion by 2027, offering ADT a large runway for growth.

Key partnerships with Google and State Farm are critical to ADT’s growth strategy. The collaboration with Google has bolstered ADT’s brand and increased the adoption of smart home devices, boosting customer retention and revenue per household. 

For example, homes equipped with Google devices have seen average revenue per user double from $700 to $1,400.

The State Farm partnership, while initially offering lower revenue per customer, has proven to be an effective way to scale. 

By targeting State Farm’s 14 million policyholders, ADT can grow its subscriber base with minimal customer acquisition costs. This initiative is already yielding results, with two-thirds of transactions involving upselling.

Financially, the company is in a stronger position after streamlining its business. The sale of its commercial segment and the wind-down of its solar operations have allowed ADT to focus on its core residential security business.

The company has also reduced its debt, further strengthening its balance sheet. With a leaner, more focused operation, ADT can capitalize on its market opportunities.

The proprietary ADT+ platform adds another layer to the company’s growth potential. This new app and hardware suite integrate seamlessly with smart home devices, creating opportunities for upselling and further enhancing customer retention.

All these factors enabled ADT to achieve a 20% Uniform return on assets ”ROA” last year.

Despite this strong performance, the market still has concerns over competition coming from more established players in the DIY space, reflected by the company’s Uniform P/E ratio of 13x.

However, ADT’s strategic focus, coupled with industry tailwinds and a growing addressable market, creates a strong foundation for future success. 

The company has demonstrated its ability to adapt and compete in the DIY security market while maintaining its leadership in professional home security. 

With clear signs of growth, strengthened financials, and valuable partnerships, ADT is well-positioned for long-term success. 

Investors should consider the potential for further gains as the company’s transformation unfolds.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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