Over the past six months, ADT has been a great trade. While the S&P 500 was flat, the stock price has climbed by 11.9% to $8.38 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in ADT, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is ADT Not Exciting?
We’re happy investors have made money, but we're swiping left on ADT for now. Here are three reasons why you should be careful with ADT and a stock we'd rather own.
1. Decline in Customers Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like ADT, our preferred volume metric is customers). While both are important, the latter is the most critical to analyze because prices have a ceiling.
ADT’s customers came in at 6.4 million in the latest quarter, and over the last two years, averaged 2.3% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests ADT might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect ADT’s revenue to rise by 4.3%. While this projection implies its newer products and services will spur better top-line performance, it is still below average for the sector.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
ADT historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.2%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.
Final Judgment
ADT’s business quality ultimately falls short of our standards. With its shares beating the market recently, the stock trades at 9.7× forward P/E (or $8.38 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward the most dominant software business in the world.
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