Why Nest’s valuation is higher than Opower’s: Hardware, consumers, the home

Opower and Nest might not be direct competitors, but over the years they have quietly competed in key areas, namely building software for connected energy-efficient thermostats and focusing on energy data and algorithms. Opower even lists Nest as a “key competitor” in its latest filing. But now that Opower is going public and Nest has been bought by Google, it’s interesting to see the two companies’ disparate valuations.

Nest was sold to Google for $3.2 billion. According to Opower’s latest filing, at the midpoint of Opower’s price range at $18 per share, the company has a market value of $854 million. Earlier in the month (before pricing their range) they had an enterprise valuation of $775.8 million. So, roughly speaking, Nest was valued at over three times (and almost four times) what Opower will be worth when it starts trading.


Why such a big difference? Here are five reasons:

1. Hardware: While Nest developed a substantial data analytics engine that made its thermostat smart, the company is filled with top-notch hardware designers. Led by the lead designer of Apple’s iPod(s aapl) and iPhone, Nest was a hardware company first and foremost, and the company, now under the umbrella of Google, is hard at work on a whole suite of devices. Following the smart thermostat, Nest launched a connected smoke detector.

Opower, on the other hand, builds the software for connected thermostats (among other things), but works with third parties like Honeywell (s HON) to supply the devices. The company’s thermostat business is still nascent and isn’t contributing significant revenue yet, according to its filing.

Moderated by: Om Malik — Founder, Gigaom Speaker: Tony Fadell — Founder and CEO, Nest Labs
Om with Tony Fadell — Founder and CEO, Nest Labs

2. Direct access to consumers: Even though Nest has a business that does partnerships with utilities, it is focused on the relationship with the consumer. For example, it bought a startup that helps users understand and address their home energy consumption. Opower, on the other hand, is focused on the utility as the customer. It’s been one of the most successful startups that sells products and services to utilities to date.

The direct-to-consumer and utility-driven markets have their own unique upsides and downsides. But one of the main upsides of the consumer market is that it has fewer barriers, so companies can move into it faster and launch products for it faster. The utility industry is plagued with slow sales cycles and time-consuming trials.

Honeywell & Opower smart thermstat website
Honeywell & Opower smart thermstat website

3. Energy as a jumping off point into the home: Nest’s first product tackles the thermostat and home energy consumption, but that’s just an entrance into the connected home and the internet of things. The company is working on a variety of connected home products, representing a vast new market. Opower, meanwhile, is an energy and smart grid company, and even its new product lines (thermostat and demand response) are focused on energy software and data.

Nest Protect

4. Robotics: Some of the excitement over Google acquiring Nest seems to be the potential for Nest’s robotic technology. As Stacey explained in this post, a robot is any machine that is “smart” enough to make autonomous decisions, so the Nest thermostat is a little robot. Nest’s VP of technology Yoky Matsuoka is a former robotics researcher, and she worked on the Nest UI and algorithms. Before she joined Nest, she worked at Google(s GOOG) X, Google’s moonshot lab, and with the acquisition she’ll be returning to Google. If Nest teams up with Google’s Andy Rubin, who is now working on robotics there, we’ll know that Nest’s robotic technology was particularly important.

5. Tony Fadell valuation boost: Part of Nest’s $3.2 billion price was built on founder and CEO Tony Fadell’s brand name as a design guru. Fadell was able to keep that valuation high throughout the years and funding rounds, attract significant media attention for product launches, and bring in valuable talent, because of his previous work at Apple and other places. While Opower’s founders are great entrepreneurs the company doesn’t have that flashy star power.