Why ADT Stock Could Be a Quiet Value Opportunity at Under 10x Earnings

Key Takeaways:

• The 2-Minute Valuation Model values ADT stock at $10 per share in 2 years.
• That’s a potential 25% upside from today’s price of $8 per share.
• ADT is expected to grow earnings at a healthy 12% annual rate through 2027, but trades at just over 9x forward earnings today.
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ADT Inc. (ADT) is a leader in security and smart home solutions, and could very well turn into one of the most compelling opportunities hiding in plain sight if the stock price sees a moderate fall or the company increases its growth.

Let’s analyze whether ADT stock represents a compelling investment opportunity at current prices.

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What is the 2-Minute Valuation Model?

Three core factors drive a stock’s long-term value:

1. Revenue Growth: How big the business becomes.
2. Margins: How much the business earns in profit.
3. Multiple: How much investors are willing to pay for a business’s earnings.

Our 2-Minute Valuation Model uses a simple formula to value stocks:

Expected Normalized EPS * Forward P/E ratio = Expected Share Price

Revenue growth and margins drive a company’s long-term normalized earnings per share (EPS), and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.

Why ADT Stock Looks Undervalued

Forecast

Looking at the earnings forecast chart for ADT stock, analysts expect the company’s normalized earnings per share (EPS) to grow from $0.75 in 2024 to $1.05 by 2027. That’s a healthy 14% compound annual growth rate over the next three years.

For context, this growth comes as ADT continues to expand its residential and commercial security business while building out its smart home offerings and recurring revenue streams.

We’ll use a round 2027 EPS figure of $1.00 for our ADT stock valuation.

This earnings growth for ADT stock is likely to be driven by:

• Market Leadership Position: As the most recognized brand in home security, ADT maintains a strong competitive position with over 6 million customers nationwide.
• Recurring Revenue Model: ADT generates approximately 75% of its revenue from recurring monthly payments, creating predictable cash flows and business stability.
• Strategic Partnerships: Its partnerships with Google and State Farm have opened new growth avenues in smart home technology and insurance-linked security services.
• Cost Efficiency Improvements: ADT has been streamlining operations and reducing customer acquisition costs, which should drive margin expansion over the next few years.

View ADT’s full analyst estimates (It’s free) >>>

Is ADT Stock Undervalued Right Now?

ADT stock currently trades at just over 9x forward earnings, which is well below its 3-year average P/E multiple of about 13x.

We’ll use a conservative 10x forward P/E multiple in our valuation.

This seems like a pretty reasonable multiple because it’s:

1. Below the stock’s 3-year average multiple
2. Around the same rate as the stock’s annual earnings growth

Analysts expect the company’s earnings to grow at a 12% CAGR. A 10x P/E multiple would put the stock at a price-to-earnings growth ratio of less than 1 (10/12), which is good because a PEG of 1 typically means a stock is reasonably valued.

Fair Value of ADT Stock

Using our 2-Minute Valuation Model and applying a conservative approach:

• Conservative 2027 EPS estimate: $1.00
• Conservative forward P/E multiple: 10x

Expected Normalized EPS ($1.00) * Forward P/E ratio (10x) = Expected Share Price ($10)

The 2-year expected ADT stock price we would get from this valuation is $10 per share.

With ADT stock currently trading at around $8 per share, this implies that the stock could have a potential upside of 25% over the next two years, which would be a 12% annualized return.

Keep in mind, this is just a valuation exercise, and we don’t know for sure what the stock’s price will be in the future.

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What is the Target Price for ADT Stock?

Analysts think ADT has a bit of upside today with an average price target of around $9.24 per share.

That indicates that they see about 15% upside for the stock from its current share price:

Risks to Consider

While our valuation suggests that ADT has a bright future ahead and could be undervalued if the share price falls, investors should be aware of several risks:

• Despite recent deleveraging efforts, ADT still carries substantial debt on its balance sheet, which could limit financial flexibility.
• The home security market faces rising competition from tech giants and DIY solutions that typically have lower upfront and monthly costs.
• ADT must continuously focus on reducing customer churn as consumers have more security options than ever before.
• As a company with significant debt, ADT’s financing costs could increase if interest rates remain elevated longer than expected.
• Weakness in new home construction or existing home sales could impact ADT’s customer acquisition in the residential segment.

TIKR Takeaway

ADT offers investors a compelling combination of growth and value. It provides essential security services that generate recurring revenue, and its expansion into smart home solutions positions it well for the future.

Is ADT stock a buy over the next 24 months? Use TIKR to check the stock’s analyst price targets, growth forecasts, and see if the stock is undervalued today.

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Disclaimer:

Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any stocks mentioned. Thank you for reading, and happy investing!