We view RMR as an appropriate valuation proxy since the measure is a key component in observing normalized FCF trends and is indicative of asset base growth. Our PT of $9 is based on our 42x-45x EV/RMR target (39-42x previously with Solar + Commercial Businesses) on our exit run-rate RMR estimate of >$396 million in 2025, which includes a $1bn reduction in net debt. Here, we assume ADT's partnership with Google and State Farm result in a 7%-8% compounded revenue growth. We discount our projected RMR by an ~8% WACC (12.5% cost of equity + 4.0% post-tax cost of debt). Our target RMR multiple is in line with the upper end of historical levels and assumes a meaningful improvement in the company’s adjusted FCF margin. Assuming our $9 target price would represent a ~10% Adj. Levered FCF -to- Equity yields near 10% or roughly 9% on an unadjusted basis.

Risks to our thesis are: (i) higher/lower levels of churn, (ii) execution setbacks relating to ADT's partnerships with Google and State Farm, (iii) increasing competition from both traditional competitors and/or Big tech new entrants, (iv) increasing acceptance of automated alarm systems, reducing the relevancy of professional security monitoring, (v) technical pressure from PE overhang, and (vi) slower/faster-than-expected debt pay-down. If the impact on the company from any of these factors proves to be more negative than we anticipate, the stock will likely have difficulty achieving our financial and price targets. Likewise, if any of these factors proves to have less of an effect than we anticipate, the stock could materially outperform our target.