Resideo Technologies (REZI -2.85%) has a mission to be the leader in the connected home -- a house where all the major electronics and systems are connected to the internet and can be controlled remotely through user-friendly apps.
This notion of a connected home used to be science fiction, but several companies are racing to bring it to market. Resideo already has a presence in 150 million homes with its brand of Honeywell heating and cooling systems -- giving it a huge head start over the competition.
Resideo is a new name to most investors because it was spun off from Honeywell International less than one year ago, but this under-the-radar company has significant growth potential as it leads the charge toward the connected home.
A full suite of home control and security products
Resideo sells residential thermal products and security solutions for homes and businesses around the world. The company is split into two segments: products and distribution. Each segment generates a similar level of revenue, but three-quarters of the company's earnings come from the products segment.
That segment consists of a diverse catalog of over 3,000 products used to power and control many of the essential components of a home, including its thermal controls. This segment also includes the company's security products and software solutions. The table below summarizes its products based on which part of a home they are found in.
| Where to find it | Product description |
|---|---|
| On the wall | Thermostats, interior video surveillance, security panel |
| Behind the wall | Heating controllers (furnace, boiler), dehumidification systems, water leak/freeze detection |
| On the exterior | Video cameras, motion sensors |
| In the cloud | Mobile apps, security software |
Data source: Resideo investor presentation.
At a conference call presentation in June, vice president of investor relations Michael Mercieca described how to think about the company's products:
We're on the wall with thermostats. We're behind the wall with residential thermal systems, so your boilers, water heaters, humidifiers. Not sexy, but very, very profitable. On the exterior with security in cameras, security panels, etc. And all brought together with our mobile application.
Resideo's distribution segment is a leading wholesale distributor of security and low-voltage electronic products. Although this segment has a boring description and only generates one-quarter of the company's earnings, it is strategically important because wholesale distribution is an important sales channel for security products. When most people want to install a security system, they call a professional contractor to provide the equipment and install the system. Resideo's distribution business works with these contractors to recommend equipment -- including equipment from other manufacturers.
The company touches many crucial parts of the home through its diverse product offerings and also has a robust distribution effort for security solutions. This strong lineup of products and services puts it in a unique position to connect homes digitally through software.
Resideo's advantage in delivering the connected home
With a goal of establishing itself as a connected-home leader, Resideo aims to drive growth alongside several long-term trends. A connected home can be more user-friendly by making all the essential controls (temperature settings, lighting, security, etc.) accessible from a mobile app. This could also make homes more efficient. For example, you could remotely turn off your heating or air-conditioning if you forgot, or software can be used to automatically optimize use of resources such as power and water.
There are several companies trying to crack into the market for connected homes. Alphabet sells smart thermostats under its Nest brand. Through its acquisition of Ring, Amazon.com now sells home security products. And several devices -- including TVs, lights, and microwaves -- can be controlled by Amazon's Alexa or Alphabet's Google Home.
Resideo has a clear advantage over tech-enabled competitors: It's already embedded in the home. As described earlier, Resideo products can already be found on the wall, behind the wall, on a home's exterior, and increasingly on the cloud through software. The company has an installed base of the products that run the home; now it just needs to update these products with software and connect them to the internet.
The product transition has already started for the company. Today, Resideo counts over 5.6 million connected-home customers with access to control or monitor some aspect of a home. However, 5.6 million is a small fraction of the company's 150 million home install base, which implies significant progress still to be made.
Resideo also has a distribution advantage stemming from its legacy relationships with over 100,000 professional contractors and 3,000 distributors. In the home construction and installation markets, the vast majority of home devices are sold through the professional contractor channel. Because Resideo has a strong hold over the channel, it has the best shot toward getting its connected-home products to the customer.
Image Source: Getty Images.
Significant growth ahead
Moving toward a more connected society is an inevitable trend. Smart devices are more efficient and user-friendly, and technology is bringing down the cost of mass-producing these next-generation products.
How will the promise of this new technology materialize into business growth? Resideo estimates that the market for connected things will nearly double from 7 million units in 2018 to 12.8 million units in 2020. And a high rate of growth should persist beyond 2020.
Resideo will likely benefit financially in a few ways. First, the advent of connected products will cause several homes using legacy products to upgrade from analog to digital devices faster than they otherwise would have. Second, the company should see the average selling price of its devices increase as they increase in sophistication. And third, Resideo will benefit from more recurring revenue streams as it sells more software subscriptions bundled with its hardware products. The net result should translate into attractive growth for the company.
Resideo is on the pole position to capitalize on the connected-home trend. Given the recent spin-off, not many people are familiar with the stock, but that lack of familiarity could create a buying opportunity for nimble investors. Resideo has a full suite of products and a solid distribution strategy to fulfill its mission of being the connected-home leader.
