A Conversation with Shelly Group
A Quality High-Flyer in Smart Home Technology
As a brief introduction since this is my first post, I am a former international small cap equity analyst primarily focused on under-appreciated stocks that benefit from sustainable thematic drivers and are likely to outperform over a 5-10 year investment horizon. Unlike other Substacks, I will typically keep these posts short and concise, focusing on what makes this business special, why I think the stock can re-rate, industry drivers, and weaknesses/risks, all with the purpose of elaborating my thesis for sustained outperformance.
These posts are by no means financial advice, and they are simply educational content on companies I have researched and am (mostly) personally invested in. Please feel free to share your thoughts in the comments – I am always looking for outside opinions on my ideas.
I came across Shelly Group through Matas Baliukonis, the author behind The LongView, and was immediately enthralled with the story. Shelly certainly fits my mold of uncovered international small cap gems. I was able to have a conversation with a top manager at Shelly Group, which further cemented my confidence in the story. The following is the product of all the research I have conducted on Shelly Group.
If you are interested in learning more about Shelly, I have linked The LongView Substack post at the bottom of this page.
High-Level Summary
Shelly Group is a Bulgarian company that designs, manufactures and distributes IoT products and connected software that enable smart home functionality. This is all controlled through the Shelly app which enables efficient & automated energy management and convenient smart home features.
This is a high-flying, undiscovered, growth minded company that was recently listed on Xetra in April 2024 after listing in Frankfurt 2021 and in Bulgaria in 2016. The obvious risks are lower liquidity and an aggressive growth management style. However, they seem well suited to grow >30% CAGR through 2026 so this one is worth keeping an eye on. ~30x FY24 PE, ~23x EV/EBITDA.
Key Metrics
5 Yr Avg ROIC = 31.4%
Net Profit Margin = 23%
ND / EBITDA = -0.63x
PEG Ratio = ~1x
Business Overview
To set the stage, here is a very quick summary of the history of Shelly Group and their business model.
History
Founded in 2003 by Dimitar Dimitrov (current co-CEO) and Svetlin Todorov (current US Operations CEO), they were primarily a telecommunications business selling products and software services like ringtones, SMS services and child/pet trackers. In 2013 they pivoted to an IoT business which caused growth to surge, leading to their first listing in Bulgaria in 2016. The telecom business was sold off in 2019, keeping the child/pet trackers.
The engineers eventually started playing around with smart home products after they found there was no good hardware in this space, which led to the first “Shelly” being created. This product was simple, flexible and good at basic tasks like shutting garage doors. The hardware came with software and was marketed on their D2C web shop.
The products gained popularity in Germany after online DIY influencers discovered the flexibility and low price point of Shellys and began posting about them. This led to a significant success in Germany, with the country now accounting for over 50% of their sales. Consequently, the company has focused on the German market, listing in Frankfurt in 2021 and on Xetra in 2024. Notably, they are the first Bulgarian company to list in Germany.
Main Product Lines
Home Efficiency: Smart relays which monitor the energy you consume in your house and feed data to your mobile app allowing you to visualize and optimize your electricity consumption.
Smart Home: Using the same smart relays, you can automate everything in your home from shutters, lights, garage doors, HVAC all through the mobile app. No internet connection required.
Cloud Service: Connect all products into 1 app with visualizations. App has a free basic version and a premium offering for 4 EUR / month. Revenue is still insignificant from this segment.
Business Model
Sell devices then give access to efficiency monitoring software/app in a freemium model, gradually increasing the recurring revenue piece over time.
By outsourcing key component manufacturing and focusing on final assembly, they maintain a capital-light model with a capex to sales ratio of around 3%.
~30% of their sales are to Allnet, who mostly sells to resellers in Germany, and 25-30% of sales are to Amazon, who sells to resellers globally. Amazon is their most important and fastest growing channel. As Shelly becomes popular with installers, resellers will order more through these channels or potentially direct from Shelly.
Revenue Segments
Sales of Devices: 99%
Sales of Services: 1%
Sales by Geography
Dach: 51%
Southern Europe: 24%
Northern Europe: 10%
RoW: 9%
Rest of Europe: 8%
Reasons to Own
Now, here is why we think Shelly is such a special company….
Business Thesis
Shelly Group is leveraging their cheap R&D base, flat organization and high quality management team to rapidly take share of the smart home and home efficiency markets. Their advantages in terms of both price and features should continue due to their high innovation velocity and capital light business model.
Stock Thesis
While the stock trades at a high level around 37x trailing PE, this is justified given their trailing PEG of ~1x. Looking forward, their growth rate should slow slightly, but continue at 25-30% which certainly justifies the forward PE. Factoring in the lack of sell-side coverage, the recent addition to Xetra, upcoming addition to SDAX index and other market cap related thresholds they are bound to cross, and the stock is far from done. Not to mention, this seems to be a prime candidate for a takeout by a smart home product owner like Amazon, Samsung or Google.
Moat/Competitive Advantages
Strong Management Team - 2 co-founders serve as co-CEO and Head of Americas and own 64% of the company. Management consistently under-promises and over-delivers on earnings targets. The founders are enthusiastic geeks that are passionate about these products. They were described as borderline paranoid and heavily involved which leads to incredibly rapid operating speeds.
Nimble – Flat org and strong leadership allows for rapid innovation. For example, they quickly modified products to fit other chips during chip shortage. The time from product idea to release is roughly 6 months on average while larger peers like Schneider take 6 months just to pitch the initial idea internally. Management sees their speed as a key competitive advantage.
Cheap, Simple and Highest Quality - The products are priced around 50% below the competition, offering more features while being simple and easy to use. They are positioned between cheap Chinese brands and high-end Phillips/Schneider options, with Chinese brands costing roughly 10 EUR, Shelly costing 20 EUR, and high-end players costing 40-50 EUR. Due to very low failure rates, they recently increased their Gen2-Gen4 device warranties from 2 to 3 years and their pro devices from 2 to 5 years, demonstrating the high quality of their products.
Open Architecture - Unlike peers, Shelly’s devices are open sourced and 100% compatible with other brands, which attracts DIY enthusiasts and leads to interoperability with other systems. This interoperability extends to both 3rd party products and apps. As a result, they have partnerships with Amazon, Samsung, Google, ABB, and more to integrate with their smart home systems.
European Branded – Chinese comps exist in the same price range, but many prefer local devices.
Capital Light – By outsourcing component manufacturing and focusing on final product assembly, they have a capex to sales ratio around 3%.
Network Effect – Their high product ratings on Amazon and large & growing network of DIY enthusiasts posting tips & tricks for using Shelly devices provides free marketing allowing them to avoid high marketing spend up until this point. Marketing spend recently spiked, but management has advised this has peaked and is more likely to fall moving forward.
Labor Arbitrage - They do 100% of R&D in house from Sofia, Bulgaria, which is a cheap hub of high quality developer talent. They pay developers 1/3 the salary compared to major European or N American markets. My former employer similarly located their dev team in Sofia, so I can verify this is an excellent hub of cheap talent.
Solid Balance Sheet - Despite poor net working capital, they have an incredibly strong net cash balance sheet which provides downside protection and firepower to execute their organic growth strategy.
Growth Strategy
Management has set a sales target of 200 million EUR by 2026. They do not expect to achieve the same level of sales in France, the US, the UK, and other markets as they have in Germany, and they anticipate that certain products may flop. Despite these expectations, they believe their 2026 target is conservative.
Topline Growth Strategy
Key to growth is continued product releases, with the number of products set to increase by 50% in 2024 to over 100.
They have a proven internationalization strategy spread across more than 100 countries and are increasing investment in untapped EU markets like France, the UK, Italy, Poland, Turkey, and the Benelux region. Currently, 50% of sales are in Germany, and they are still relatively new in other major European markets.
They plan to expand their focus from the DIY market (approximately 10% of the overall market) to professional installers (about 80%) by training installers and securing deals with distributors. They now have an installer finder on their website that allows consumers to find a certified Shelly installer. They are also targeting builders, who represent about 10% of the market, though most sales are currently for renovations of existing homes.
Management believes installers will accept Shelly products because they offer more features (10 times more in some cases) at half the price. While installers prefer higher-priced products to take a margin on the cost, Shelly products have roughly twice as many use cases throughout the home due to their flexibility, leading to more devices being installed at a time. Installers prefer installing more devices over fewer expensive ones as they can charge per unit installed.
They will continue to expand the number of sales channels, with Shelly products recently added to the Home Depot web shop.
There is optional but increasingly tangible upside from recent deals with Vodafone/Africa Telecom to use Shelly devices to measure energy consumption in base stations in Africa. This has opened the door to industrial and commercial customers, representing a massive opportunity as they all need to measure energy consumption.
To support this growth, their manufacturing partner in China has built a second factory, which was audited to Western standards by European audit firms. This factory could be used to double production if needed.
Margin Growth Strategy
The aggressively growth-minded management team is currently prioritizing market share gains over free cash flow (FCF) to force out competition, which comes with obvious risks. They are sacrificing margins for growth, avoiding price increases, and have only raised prices twice in response to approximately 10% negative exchange rate impacts. Management expects to maintain their current EBIT margin levels of 25-26% but believes they could increase margins to 30%, although they see taking market share as more important.
Management might be downplaying the margin benefit from their ongoing professionalization of procurement initiatives aimed at improving net working capital (NWC) and FCF. This initiative includes onboarding SAP software to streamline their supply chain and other initiatives. Currently, most products are flown to Europe, so part of this professionalization is to determine how many products can be shipped instead.
As they gain scale, their payment terms with suppliers should improve. For example, they currently pay for the production of chips six months in advance, which puts pressure on working capital.
Switching from a seller to a vendor relationship with Amazon alone should result in growth and efficiency gains. This will simplify the supply chain by allowing them to sell products directly to Amazon and provide increased access to Amazon vendor services and analytics.
In the long run, their current hiring phase of sales staff in relatively untapped Western European markets like France, the UK, Benelux, and others should result in significant operating leverage. This will cause short-term margin pressure, but as these teams ramp up, they should drive both top-line growth and margin expansion.
Industry Overview & Thematic Drivers
Even if we are completely wrong about Shelly’s competitive advantage, the underlying fundamentals of their market are undeniable and should drive significant growth.
Industry Overview
The smart home market is estimated to grow somewhere in the range of 12-22% CAGR from 2023 through 2032 with IoT estimated to grow at 15-20% annually.
Shelly’s Market share is estimated at around 4% of their niche – massive room to gain share.
Thematic Drivers
Europe - Efficiency of home electricity usage. 2/3 of European homes are not energy efficient and regulation is being rolled out to target this issue.
USA – Home security. While home energy efficiency is growing in the US, the main driver of smart home systems is a desire for increased security.
Valuation Upside
On top of the estimated 20-30% medium-term earnings growth, we feel a re-rating is deserving for the following reasons.
The market assumes Shelly’s numbers are too good to be true since they are Bulgarian (first Bulgarian stock listed on Xetra). They switched to Deloitte as an auditor to alleviate concerns regarding their financials. The Bulgaria discount helps fuel the undervaluation and should alleviate over time as the market gains trust.
The stock is virtually uncovered by sell-side street analysts indicating high room for discovery upside.
A takeout by Amazon seems like a realistic end game 3-4 years down the road. Shelly products are increasingly integrated with Alexa and Amazon home installation products, so this could be a sensible acquisition for Amazon if Shelly continues to gain prominence in the Alexa product ecosystem. Shelly is engaging in similar integrations with Samsung, ABB, Google and other smaller players, so this would ideally result in multiple takeout suitors. In a conversation with Shelly Group management, I received the indication that a sale is possible, but not in the next 2-3 years as management is incredibly bullish on the company & stock.
The next main step for the stock is to be visible on SDAX in Germany. They currently fulfill all qualifications except for free float market cap, which is approaching 50% of the SDAX average, so inclusion could be imminent.
Crossing 1BN mkt cap would open the realm of potential investors greatly, further improving liquidity, discovery and likely share price.
Weaknesses/Risks
Liquidity - Management owns 64% of the company and has no intention of selling significant shares as they firmly believe in the growth trajectory of the business.
80% of their manufacturing is still done in China, but mgmt. has a contingency plan to relocate to Vietnam and Bulgaria facilities if needed. Also, they are the only customer of their partner factory in Shenzhen, which management feels mitigates this risk somewhat.
Fairly low barriers to entry in the smart home market – there are too many competitors to realistically track.
Operating leverage will be somewhat canceled out by hiring more expensive W Europe sales staff targeting the more professional installer channel. Past growth has been achieved mostly via word of mouth but they will need to invest in a formal sales staff as they target installers. So far, they have seen that these sales hires are “worthwhile” but it is unclear if that means margin accretive. They could increase prices, but the CEO prefers to keep margins lower and push out competition.
Items to Monitor
Here is what we are looking out for in the next few earnings reports…
Growth of sales staff targeting installer channel and that impact on margins
Progress of professionalization initiatives and measured impacts on NWC and FCF generation
KPIs we will be tracking
% of sales to installers vs DIY and number of trained installers
Ex-DACH growth > DACH growth (want to see sales hiring is paying off)
Continued gross margin development (showing scale advantages and pricing power)
Sales and marketing spend (jumped from 2.7% of sales in 1Q23 to 7.7% in 1Q24)
Positive FCF and improved net working capital
Questions & Tasks
The role of a research analyst is never complete, so here are a few items we need to dig further into. Feel free to leave additional questions you have in the comments.
Why are they paying dividends? As a rapid growth-minded company with fairly weak FCF generation, would cash be better served investing into growth?
Dig deeper into the relationships with Allnet and Amazon. These are essential sales channels to the growth of Shelly, so we need to be comfortable with their relationship.
The LongView Shelly Group Post:
This analysis is purely educational and by no means a recommendation to purchase Shelly Group Stock. Always perform your own research. I am a shareholder of Shelly Group.
Amazing write-up, thank you for that.