NRG Energy's deal for Vivint Smart Home an abrupt turn from cash return story

NRG Energy (NYSE:NRG) plunges to the bottom of the S&P 500 Tuesday, -15.3%, while Vivint Smart Home (NYSE:VVNT) skyrockets +32.6%, as investors view NRG's $12/share acquisition price - a 33.5% premium over Monday's close - as too pricey.

"The magnitude of the price paid delays the buyback thesis that most NRG bulls [have] stated was their top reason for owning shares," according to Bank of America's Julien Dumoulin-Smith, reiterating his Underperform rating on the stock.

"Diversification away from the retail/generation business should reduce the risk profile but introduces further uncertainties," including several well capitalized competitors and market players in the smart-home business, the analyst wrote.

"Levering up the balance sheet to gain more exposure to residential customers for a consumer discretionary business into a more challenging macroeconomic backdrop could lead to relative weakness for the shares," Dumoulin-Smith said.

The deal "shifts shareholder expectations from a clear cash flow return story to one of execution where the returns management envisions above those implies by repurchasing shares are potentially proven out over time, and may require a shift of the shareholder base over time," according to UBS analyst Ross Fowler.

The acquisition will add 1.9M customers to NRG's (NRG) existing 5.5M retail clients, and home automation represents a $165B industry with an even faster growth rate than the typical retail market, NRG CEO Officer Mauricio Gutierrez said in an analyst call.