2014 has been a roller-coaster ride for ADT Corporation's (NYSE:ADT) stock. The end of January saw the company deliver disappointing first-quarter results, and the market's reaction was swift and substantial. Performance was bad enough to trigger the biggest price decline in the company's history.
Two subsequent quarterly reports have painted a rosier picture of the company's future, and ADT's share price has been steadily pushing upward since May. While the company's stock is experiencing a sustained recovery, it's worth looking at some of the factors that could cause the company's share price to regress. The following threats to ADT's business don't guarantee that its stock will fall, but they are points that investors should watch going forward.
ADT is facing new, resource-rich competitors
ADT has built a market-leading position in the home and small business security industry; however, an influx of strong competitors threatens the company's ability to meet its growth targets. The much-touted "Internet of Things" once looked like a huge opportunity for ADT, and the company has bet big on its home automation service ADT Pulse, but the pending technological revolution might also damage the company's relevance.
Cable and telecom companies are aiming to become bigger players in the security and monitoring and home automation sectors, and their resources and positional advantages could be difficult for ADT to overcome. Companies like Comcast, Time Warner Cable, and Verizon Communications have the ability to bundle security and automation services with their more traditional offerings, enabling them to offer comparable services at prices lower than ADT's model can support.
Additionally, because these companies already supply cable and telecommunications signals to consumers, they look to enjoy certain positional advantages. The overturning of the FCC's net neutrality provisions means that cable and telecom providers could de-incentivize the use of ADT's products by slowing service, or denying functionality altogether.
Further complicating matters, Internet giant Google is positioning itself to be a big player in the home automation segment. The company's $3.2 billion acquisition of Nest was just the first visible step in a broader strategy to shape the emerging smart home market. Google and Nest recently acquired home security company Dropcam for $550 million. ADT stock has benefited from an improvement in the performance of its Pulse automation system -- take rate for the platform hit 49% of new customer additions as of the company's last quarterly report -- but the introduction of competing services from the giants of tech and telecom could disrupt its growth.
ADT could run into trouble with its former parent company
ADT has been a separate entity from Tyco International since 2012, but the two companies have remained mostly noncompetitive thanks to agreements laid out at the time of their separation. The noncompete agreements are set to expire on Sept. 29, and Tyco will have the opportunity to target ADT's slice of the home security and monitoring sector. Even if the expiration of noncompete terms has a negligible impact on ADT's business, the company will continue to be affected by its relationship with Tyco.
Brand appeal is central to ADT's operations, and allows the company to offer its products and services at a premium relative to other security companies. Unfortunately, ADT only has the rights to its namesake brand in North America and Canada, with Tyco retaining rights in other territories. This makes it difficult for ADT to expand its business outside of its principle territories, and also opens the company up to potentially damaging associations with businesses and happenings with which it is only nominally connected. As such, ADT would seem to have an incentive to purchase rights to its namesake from Tyco; however, concerns about the company's debt and liquidity mean that such a move, and its timing, could spook investors.
Debt and credit could become a problem for ADT
The heavy costs associated with customer acquisition make easy access to credit a necessary asset for ADT, and downgrades for the company's credit rating could have a material impact on its business and stock. At the beginning of September, Moody's downgraded the company's liquidity rating, while the previous fiscal year saw the agency joined by Standard and Poor's and Fitch in downgrading ADT's credit rating.
While ADT has a favorable debt-to-recurring-monthly revenue level compared to competitors like Ascent Capital Group, such a comparison begins to look less relevant in light of large cable, telecom, and tech companies, as well as smaller "DIY" app makers entering the home security and automation segments. These new entrants have the potential to significantly affect ADT's attrition rates and increase the cost of acquiring new customers. Even if the company's credit ratings maintain current levels or improve, it may be forced to take on significant additional debt in order defend its business, and some investors might not tolerate such a move.
Foolish final thoughts
ADT has made significant progress in recent months, particularly thanks to the strong performance of its Pulse platform. The company's biggest challenge going forward looks to be fending off capable competitors in the home security space, while achieving growth with its automation efforts. The risks facing the company provide no guarantee that its stock price will fall, but ADT's ability to overcome them will be a determining factor in its future performance.
Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Google (A and C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.