In Monday’s issue, I talked about one of the most powerful and unstoppable technological forces on the planet: the Internet of Things (IoT).
It’s the idea that systems, machines, devices, homes, cars – basically, everything – will all be connected through the internet.
Today, I’m going one step further and introducing a company that’s currently at the forefront of this mega trend.
As you’ll see, it brings a totally new meaning to the term “home invasion.”
A Smarter Home for a Smarter Age
Control4 (CTRL) makes automated control systems and products for the “connected home.” Its technology allows homeowners to adjust the temperature, lighting, security, media, and devices within one operating system. And its supporting service, 4Sight, also allows residents to monitor and control their homes remotely, and sends alerts in emergencies.
Basically, a smart home for a smart age…
Although Control4 was founded in 2003, shares didn’t hit the market until 2011.
Since then, the company has posted strong financials, with many of its core numbers looking robust.
This continues a growth trend from its pre-IPO days…
If you look for nothing else in a company, always look for consistent growth.
Control4 has done just that with its revenue growth and gross profit.
During the second quarter, the firm notched 13% more revenue than in Q2 2013. And on a six-month basis, sales are up 16%, compared with this time last year.
Now, you can see that Control4 suffered net income losses between 2008 and 2012. But the company has worked hard to reverse the trend – and turned a profit last year.
In the second quarter, earnings leaped by 107%, and Control4 projects further growth in the two remaining quarters of this year.
C.H.A.O.S. Meter: 18/20
Minutes before you wake up each morning, not only does the thermostat adjust to your desired level, the window shades rise, helping you wake up more naturally.
As your eyes open, you smell fresh coffee.
Yet nobody in the house is actually awake yet.
Don’t worry… it’s not a ghost.
Just as the growing “connected car” trend is turning our vehicles into mobile computers and linking them to the internet, the “connected home” phenomenon is gaining just as much traction.
In other words, harnessing technology and the Internet of Things to connect your systems, appliances, and devices and boost home automation.
And Control4 is the poster boy of the ideal connected home. Have a look…
This is the future of First-World living.
Control4’s technology is a central operating system for the home, where all your “smart” devices sync up and work in unison. Once they’re connected, users can control, automate, and customize their homes however they like.
Aside from the added convenience, though, if anything happens to your home while you’re gone (a leak, fire, break-in, etc.), or perhaps your kids don’t arrive home from school on time, Control4’s 4Sight system immediately alerts you on your mobile device.
Control4’s technology provides an ecosystem that’s helped define this growing industry. And its operating systems and products also connect to other IoT products and applications.
But there are two common complaints with Control4’s technology…
First, the installation process can be overwhelming and invasive.
Second, if you want to update your Control4 system, you can’t just download new versions like you can with a smartphone operating system.
For such advanced technology, these are two pretty dated methods.
C.H.A.O.S. Meter: 14/20
One look at Control4’s share price action shows a pretty wild ride, with the stock ranging from $13.77 to $32.50 over the past year.
After analyzing this behavior, it’s apparent that validation of its technology has a heavy influence on shares.
As you can see, the biggest validation came in January when Google (GOOG) purchased Nest (which makes high-tech, connected thermostats) for $3.2 billion. In two days, Control4 shares blasted 70% higher – from $18.53 to $31.45.
Going forward, any IoT-related news, acquisitions, or rumors could send shares soaring again.
But there’s an even greater catalyst in Control4’s future…
Since Google’s Nest acquisition, other companies have snapped up IoT-related firms.
This means two things:
- Tech giants recognize the importance of the IoT – and want specialist firms and patents in their portfolios.
- Control4 has a bull’s-eye on its back, because not only is it making smart, connected devices, it’s also successfully monetizing them.
Any of them would benefit from a pure-play IoT company like Control4.
As the IoT industry surges in the coming years, Control4 shares are very well positioned for short-term acceleration from validation and big-picture acceleration due to a potential takeover.
C.H.A.O.S. Meter: 19/20
Control4’s technology wouldn’t be in anyone’s home or business if it weren’t for its distribution network, which is responsible for getting Control4’s products into national and regional retailers, and in front of consumers.
This is the driving force behind Control 4’s orders – and the company is doing a good job of expanding its reach…
These dealers then work with customers on solutions that fit their needs. It could be anything from one room, to the entire house. The dealer then schedules an installation.
But Control4’s orders aren’t just restricted to residential homes. A small portion of its revenue comes from small commercial installations and multi-dwelling units, like hotels.
In consistently growing both its North American and international distribution channels, orders for Control4’s system controllers have steadily grown, too.
The decrease in 2013 was due to a 21% increase in Control4’s average selling price per unit. But that hit didn’t last long, as Control4’s dealers sold 17,516 units in the second quarter, compared to 15,208 units in Q2 2013.
So far this year, Control4 has sold 33,740 units, compared to the 32,966 units it sold in the same period last year.
While no dealer or distributor accounts for more than 10% of Control4’s total order revenue, the company does lean too heavily on Sanmina and LiteOn’s manufacturing facilities in China to help fulfill those orders. Any disturbance there, and the company would have a mess on its hands.
In addition, seasonality tends to play a part in the company’s revenue growth. But as you can see, sales rise steadily over the course of the year – and the trend from here is higher.
C.H.A.O.S. Meter: 15/20
As the IoT industry expands to its projected $7.1-trillion valuation by 2020, Control4 will need to continue growing its U.S. dealer base to benefit. To really scale its business higher in the years ahead, I’d like to see the company pick up more major commercial contracts.
Control4 also needs to scale its international presence to take advantage of the underpenetrated IoT opportunity overseas.
The other way for Control4 to boost its presence is to consider its pricing structure.
While Control4’s business model has proved very successful up to now, with an average cost of $9,600 for a medium-sized home installation, its technology is almost exclusively aimed at high-income customers.
In fact, Control4 defines half its addressable market as households with incomes of $250,000 or higher.
This will continue to bring in revenue for the company, but it needs to find ways to offer less expansive solutions for lower-income families.
C.H.A.O.S. Meter: 15/20
OVERALL C.H.A.O.S. RANKING: 81/100
Final Verdict: The IoT is a multi-trillion-dollar trend in the making – and Control4 is one of the companies at the forefront of it.
But it’s also going up against some huge hitters – Google, Apple, Samsung, and Microsoft (MSFT), all of whom are just breaking into the industry.
However, Control4 is adopting the motto, “If you can’t beat ‘em, join ‘em.”
As a pure-play IoT firm, Control4 and its intellectual property would add tremendous value to any of those bigger companies (which would have to spend hundreds of millions in R&D, anyway). I mean, why start from scratch when you can just buy someone else’s completed work?
That’s why Control4 is one of the market’s biggest (and most unknown) takeover targets.
Control4 isn’t going to redefine the entire industry… but it sure can redefine your profit potential! With the stock hovering near its 52-week low, and higher sales and profits expected for the rest of the year, now is a good time to consider buying some shares.
Or, for better leverage, consider the October 2014 $22.50 call options.
Your eyes in the Pipeline,