SmartRent (SMRT): This Could Be A Lock To Go To Zero
Basics:
SmartRent’s former largest investor, RET Ventures, is a VC fund. 60% of SMRT’s revenue last year came from RET Ventures portfolio companies. In Q2’23, RET Ventures sold its entire stake in SmartRent. Subsequently, new orders collapsed 66%. We have learned that SmartRent’s products were optimized to be sold to RET Ventures LPs, and with this circular demand now removed, look out below.
SmartRent distributes and installs smart home systems, primarily “smart” locks, to large multi-family properties. SmartRent used a Croatian supplier that had a known security vulnerability. Instead of cutting ties with this supplier, SmartRent acquired it and changed the name of the products. FCC documents show that SmartRent still uses this formerly comprised supplier of locks from Croatia.
These security vulnerabilities have real-world consequences. An apartment in Alexandria, Virginia installed SmartRent locks. According to police reports, a man was able to open several apartments, eventually sexually assaulting one woman. This came after residents complained about the locks. A man was charged with intent to commit murder and rape after he was able to access these apartments. After this came out, SmartRent’s co-founder and Chief Technology officer sold 93% of his SmartRent holdings.
Former employees were more than willing to speak about the company, with not many saying flattering things. Several described the company as a “mess” with a “broken culture,” and one said that “how horrible it was” was the thing that stuck out the most about the company.
We will be posting part 2 of our story soon. It will contain more examples of how SmartRent’s locks have proven unsafe and their real-world consequences. We will also be further discussing SmartRent’s accounting and why we think there is a chance it follows fellow smart-lock company Latch into delisting and trading below net cash. For now, let’s focus on how SmartRent’s growth engine is broken, how its locks have caused tragedies. More soon…
Initial Disclosure: Bleecker Street Capital is short shares of SmartRent. Please see the full disclaimer below.
SmartRent Background
SmartRent is a “smart-home” company. It primarily generates revenue from the sales and installation of smart locks; it sells these to big apartment buildings and pitches various ancillary benefits such as letting a leasing office people let themselves in to tour apartments and other smart-home features like thermostat control.
We believe that shares of SmartRent are drastically overvalued. It is an unprofitable hardware company with low gross margins and a software story that is not playing out. We believe the key driver of SmartRent’s growth has now disappeared, and the company will have a hard time replacing business.
New Orders Collapse Once Shareholder Partner Bails On SmartRent
SmartRent’s second-quarter report showed a drastic decline in new orders, which SmartRent discloses as “Units Booked.” This metric is a key indicator of demand, according to SmartRent.
In the second quarter, demand for SmartRent products collapsed drastically. New orders fell 66% year-over-year.
SmartRent’s CEO tried to assuage investors on the call, giving a mealy-mouthed answer about why there was such a sudden collapse in demand.
“And we're not on pace to deploy double the units we did last year. And so some of that is this -- we have a good backlog that we're working through, and customers don't sign new orders, so we fulfil the ones that they have in place. So I think it just is -- it's sort of an anomaly that it came in where it is.”
We believe this is not why demand cratered; rather, the answer to demand collapse lies in RET Ventures, a VC fund with a unique relationship with SmartRent. This quarter reveals that SmartRent’s ‘sales funnel’ and future demand are likely permanently impaired.
SmartRent references units booked as binding orders executed during a quarter. This is SmartRent’s future revenue. As units booked go, so does future revenue. SmartRent discloses as much in its filings:
“We utilize the concept of Units Booked to measure estimated near-term resource demand and the resulting approximate range of post-delivery revenue that we will earn and record.”
As units booked collapse, so does future revenue. We believe SmartRent’s sales engine has been permanently damaged, and as a result, future results will suffer tremendously.
Why Did SmartRent Demand Suddenly Collapse? Circular Relationship With RET Ventures
We hope to build on the excellent work of Night Market Research and Guasty Winds, who have published excellent research on SmartRent’s business model, accounting issues, and relationship with RET Ventures.
SmartRent’s Sales Funnel:
“Throughout our history, SmartRent has obtained equity funding from strategic partners that have affiliates with whom SmartRent transacts on a commercial basis in the ordinary course of its business. These strategic partners include RET and the Lennar Corporation. As such, we have customers who have affiliates that are stockholders of SmartRent. SmartRent charges market rates for products and services, and the commercial arrangements with these customers were entered into on an (sic) arms’-length basis. (We make typos too, but it should be “arm’s length”).
We spoke to several SmartRent employees and learned that the relationship was even more intertwined than we thought. SmartRent’s products and sales pitches were specifically tailored to the needs of RET Ventures, LP, and they struggled to deliver a product that was satisfactory for non-RET Venture LPs.
We learned that these LPs got sweetheart deals when purchasing from SmartRent. Indeed, the very first response from a former sales executive when asked how SmartRent sold its product was to reference RET Ventures.
“Well they have that big investor that owns a bunch of stock. A lot of demand comes from there, and they get better deals.” - Former SmartRent Sales Executive”
Well, SmartRent HAD a big investor. Now RET Ventures has fully exited its stake. And we believe this will crush SmartRent’s business model.
SmartRent’s former largest shareholder, responsible for 60% of revenue, has abandoned ship, removing a key incentive for its portfolio companies to purchase from SmartRent. Normally, a large shareholder selling wouldn’t crush a company’s business model, but the RET Ventures situation is unique.
As RET Ventures Exits, Revenue From RET Ventures LPs Collapses, New Demand Nowhere In Sight
Last year, customers that are LPs in RET Ventures fund made up 60% of revenue. As RET Ventures began selling its stake in Q1, its LPs stopped or slowed down their accounts with SmartRent.
Historical revenue from entities tied to RET Ventures:
As Night Market Research laid out so well, RET Ventures is a VC fund that has many large multi-family investors as LPs in its funds. RET Ventures will then invest in companies and attempt to drive revenue to its portfolio companies from its LPs. This model exists elsewhere, but it's still relatively uncommon.
Don’t take our word for it; a RET Ventures principal says as much. Again, from Night Market Research:
“We figure out similar to all of you guys in the room what are the operating problems that are facing the industry today. Then we go out, and we find technology solutions to address those problems. Once we do that, we try to drive a lot of revenue to our portfolio companies from our LPs…”
As RET Ventures exited its position, there was no longer any incentive for its portfolio companies to purchase SmartRent locks, and new orders went down 66% year over year. SmartRent now has a demand problem that it doesn’t seem to know how to solve.
Let’s See What Happens When RET Starts Bailing
SmartRent discloses customers tied to RET Ventures.
“The significant customers of the Company are also limited partners of an investor in the Company.”
We can look at Customers A and B’s habits. In Q1 2022, Customers A and B made up 40% of SmartRent’s revenue. In Q2 2022, that number fell to 29%. When RET Ventures began dumping its stake in Q1 2023, Customer A was responsible for 16% of total revenue (down from 22% in Q1 2022), and Customer B had fallen below 10% of total revenue. By Q2 2023, Customer A and Customer B were below 10% of total revenue.
If you are a visual learner:
We believe that not only does SmartRent have a demand problem, but it also has much more serious and impactful security issues. Perhaps this explains why SmartRent's co-founder and CTO dumped 93% of his stake in the open market this summer.
Does SmartRent Have A Long-Running Security Vulnerability?
In 2019, there was a well-publicized hack of Zipato. Zipato is a Croatian lock and hub equipment supplier. Zipato’s products were hacked in mid-2019, and SmartRent announced that just 5% of their installs could have been tied to the security vulnerabilities found in Zipato locks. After this hack, SmartRent acquired Zipato (also known as Tri Plus Grupa, the holding company it acquired that owned Zipato), it then scrubbed all mentions of Zipato devices from its website. However, we’ve learned that SmartRent still uses these previously hackable locks.
Several years later, despite a re-branding, it appears per FCC documents that SmartRent is still using Zipato products. The Zipato acquisition was highlighted on page 22 of SmartRent’s investor presentation.
In a TechCrunch story, SmartRent claimed that “fewer than 5% of its apartment-owning customers were affected by the vulnerable technology.” For their part, the security researchers only released their findings after the flaws had been fixed, but the issues could remain. SmartRent chose not to cut ties with Zipato, though. Instead, they doubled down and acquired Zipato soon after.
In 2020, SmartRent disclosed that it spent $2.4 million on the Zipato acquisition (it acquired parent company Zenith Highpoint).
SmartRent: Unauthorized Entries
We believe a pattern of security vulnerabilities has led to serious victim damage and suffering resulting from SmartRent products.
Earlier this year, we were alerted to a break-in at an Alexandria, Virginia, apartment that led to a sexual assault. The news article from ARLNow quoted a resident who mentioned that “smart locks” had just been installed several weeks prior.
“The incident happened in the early morning hours of Wednesday, police said. A resident tells ARLnow that it happened at the Courthouse Plaza Apartments at 2250 Clarendon Blvd. “Police swept every apartment, guns drawn around 6 a.m., looking for someone,” the resident told us yesterday evening. “People woke up with their doors wide open. Break-in happened around two weeks after management installed ‘smart locks’ on everyone’s door. You control them with a sketchy app. The whole thing is fishy.”
The story reveals that there were issues with the smart locks that had just been installed at the location, an Equity Residential apartment. We should note that Equity Residental’s former general counsel is on the board of SmartRent. When the SmartRent app said it was locked, the freshly installed locks would leave apartment doors open. We confirmed that this particular apartment building had recently installed SmartRent locks, just before the incident leading to burglary with intent to commit murder and rape charges occurred.
“Multiple residents told ARLnow at the time that the Courthouse break-is followed the installation of smart locks, which some claimed would leave apartment doors open even when an app said it was locked.”
We confirmed that 2250 Clarendon Blvd. had just installed SmartRent locks in their doors. 2250 Clarendon is an Equity Residential apartment. Equity Residental’s general council is on the board of SmartRent. SmartRent was built on a circular demand model.
“Geremy Bridgeforth, 34, of Washington D.C., is charged with Burglary with Intent to Commit Murder/Rape/Robbery and Object Sexual Penetration. During the course of the investigation, detectives determined that between April 1 and April 2, the suspect entered additional residences in the 3900 block of Fairfax Drive and stole property. He was charged with Burglary (x2), Credit Card Theft (x2), Credit Card Fraud (x2) and Petit Larceny related to those offenses.”
SmartRent’s Chief Technology Officer sold 93% of his stake in June. The CTO was also a co-founder of the company.
SmartRent hid the fact that it was still using the formerly hackable Zipato locks.
SmartRent scrubbed all signs of Zipato from its website, instead rebranding under the generic “Alloy” brand name. However, FCC documents reveal that SmartRent has continued to use the Croatian lockmaker. While the brand name is now Alloy, FCC documents show that Tri Plus Grupa / Zipato is still the manufacturer.
SmartRent Long Thesis Is Incorrect and Misguided, TAM Is Vastly Overstated
There have been several long theses published on SmartRent, and we have reviewed other long pitches on the stock. We think there are several key issues.
Issue 1: Will SmartRent Keep Booking New Orders? NO, THEY WON’T
We reviewed the letter of one prominent shareholder who said it expected SmartRent to keep booking new orders. SmartRent’s new orders collapsed as soon as RET Ventures sold its stake. New orders down 66% y/y.
Issue #2: What is SmartRent’s TAM? IT AIN’T ALL THE APARTMENTS IN THE US
Longs argues total TAM is the total total rental units in the US. From a public long thesis:
“To give you an idea of their growth potential, SMRT has installed 600,000 units, and there are 45 million rental units across the U.S., and with no serious competition today, it’s going to be exciting to watch SMRT grow. Link”
Grossly Overstated TAM
Returning to their April 2021 investor presentation, management suggested that a Total US Addressable Market would be in the $30 Billion range, based on a rental stock of 44 million units. We think SmartRent’s true TAM in the US is closer to 10 million units. Big corporate landlords who own large multi-unit properties are their client base. And its growth engine was based on circular demand that we think is now permanently broken. We think SmartRent’s growth engine (the aforementioned sales funnel) is functionally dead. Investors do not like owning unprofitable “tech companies” when revenue is declining massively like we think it will soon be.
Conclusion
We haven’t even touched on SmartRent’s potential path to zero. We will lay out next week additional break-ins and security issues tied to SmartRent. We will show how SmartRent’s accounting is getting pushback from the SEC and is mirroring Latch, which is now being delisted. We think SmartRent could meet a similar fate. We think their security vulnerabilities could create massive liabilities for SmartRent and its clients, and we think that the market doesn’t understand. We are short shares of SmartRent, and think it is going much, much lower.
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