Nearly breaking a buck per share, SMART Technologies Inc. (SMT) recently made it to GuruFocus’ 52-Week Low List. At its current price of $1.14, shares are down nearly 90% from its IPO price of almost $17 just five years ago.
What has caused such a massive decline in value, and should you be interested in scooping up the business at such a depressed price?
The Business
SMART designs, manufactures, and sells so-called “smart boards”, or interactive whiteboards. It is the #1 global provider of interactive displays with an installed base of >2.8 million classrooms and 200 thousand meeting rooms. Its products are in 175 countries and used by nearly 70 million teachers and students.
As a global leading brand in education interactive displays, SMART’s business plan is fairly straight forward. Having already disrupted the dry-erase whiteboard market, the company wants to build a recurring revenue base in software while branching out into the enterprise/corporate market.
Growth Opportunities
SMART distinguishes its growth plans between its education and enterprise segments.
In education, the company aims to attract a growing portion of school budgets that are dedicated toward technology. While worldwide K-12 education annual technology spending is expected to grow from $27 billion in 2014 to $31 billion in 2018, the worldwide K-12 annual software spend forecast to grow from $5.0 billion to $6.7 billion over the same time period. With over 2.8 million displays installed globally (~2x market share of the nearest competitor), SMART believes it is well positioned.
For enterprise, the company wants to take advantage of the growing spending for conferencing and collaborative tools. Enterprise spending on Unified Communications and Collaboration (UC&C) products is expected grow from $17.5 billion in 2012 to $20 billion in 2016. The European conferencing services market alone is expected to grow from $1.8 billion in 2013 to $2.6 billion in 2019.
Management
In trying to break into growing adjacent markets, it does look like the company’s management team has the experience and industry connections to pull it off.
Currently, management owns roughly 3% of the company.
A Risk of Obsolescence
A SMART Board has always been an expensive investment for schools, yet the technology is becoming increasingly obsolete.
The SMART Board is the input device and display of a separate computer. Installation of the system requires that the device be mounted on the wall in place of a typical white board, along with electrical work for the power cables and data feeds. On the other hand, a tablet-based system only requires a projector and a retractable screen, and can be used along with a regular whiteboard. That results in a better system for a fraction of the price. Additionally, the growing penetration of student laptops and tablets, along with their declining price, has obviated the need for most SMART board applications.
The onslaught of obsolescence can be seen in the firms declining sales and uninspiring profitability.
Indeed, analysts expect -37% annual EPS growth over the next five years.
The only way to get out of this downward spiral seems to be with further innovation, improving its product and tapping into new markets. As it precipitously shrinks in size however, it becomes increasingly difficult for SMART to finance this research and development. The company’s R&D budget has actually fallen over the past four years, with its cash balance dipping dramatically.
Valuation
Using this years EPS estimate of $0.01 as a base in the DCF, its difficult to get SMART to price out under any assumptions. At its current price, shares are still pricing in future growth despite heavy competitive pressures and declining profitability.
A bet on the company today would imply that you believe the firm can return to growth fairly soon, either in its core education market (doubtful), or in adjacent markets such as enterprise (costly). With a lack of much needed funding already, it looks like the clock has already started ticking on the company’s ultimate demise.
For more ideas like this one, check out GuruFocus’ 52-Week Low Screener or the rest of R. Vanzo’s Articles.
