Alarm.com: A Great Business Model
About the company
Alarm.com Holdings Inc. (NASDAQ:ALRM) was founded in 2000 as a business unit within MicroStrategy Inc. (NASDAQ:MSTR). In 2009, Alarm.com was established as a separate company when MicroStrategy sold all of its interests in it. Alarm.com's stock began trading on the Nasdaq Global Market on June 26, 2015. The price of the common shares at the IPO was $14.00 per share. Since then, it has grown tremendously.
ALRM Data by GuruFocus
Alarm.com operates through two reportable segments: "Alarm.com" and "other." The Alarm.com segment is by far the bulk of the business; it primarily provides cloud-based software platforms that enable intelligent connectivity for devices that protect properties and associated solutions. The main source of revenue (~94.5%) for the company is derived from the Alarm.com segment.
Alarm.com's platform enables homeowners and businesses to enhance the security of their properties with automation and control of various connected devices. It offers solutions to control and monitor security systems, as well as IoT devices, including door locks, garage doors, thermostats, video cameras, video monitoring and analytics solutions, escalated events, video doorbells, intelligent integration, live streaming, secure cloud storage and video alerts.
The other segment is dedicated to the exploration, development and provision of automation solutions and energy management products and services for residential and commercial markets in related sectors.
In terms of how customers use the products, the company provides a permission-based online portal that provides account management, sales, marketing, training and support tools. A unified interface displays key operational and customer experience indicators, including technician performance, system reliability and customer engagement metrics, installation and support services, MobileTech Application and Remote Toolkit and much more.
The businss model
Alarm.coms primary offering is an operating system for the connected property, which allows people to control their home or business remotely via an app on their phone, tablet, or other devices.
Alarm.com generates revenue through Software-as-a-Service (SaaS) and license fees through thousands of independent service providers who resell these services and install devices to end-users and pay a monthly subscription fee to Alarm.com. They also market and sell these services in their local markets. The majority of the company's revenue comes from operations in the United States and Canada.
The company's platform and applications are very sticky, as shown by high renewal rates. Once a customer has invested in the hardware which works with its platform, it becomes very difficult and costly to switch to a competitor.
Valuation
Alarm.com is showing up as significantly undervalued according to the GF Value chart.
In addition, the company has a very high GF Score of 97. The company has remarkably high profitability and growth ranks and has a solid predictability rank.
However, GuruFocus' measurements of value tend to focus on historical success. Just because a business has done well in the past does not mean that performance will continue. Alarm.com's price-earnings ratio is on the high side at 43.8, and the forward price-earnings ratio of 32.68 is not much better.
Now, Alarm.com is still cheaper than the software industry average price-earnings ratio of 45.3, but I don't think that comparison means much. The company grew revenue over the previous five years at a CAGR of 18% with an earnings CAGR of 18.4%. If growth continues at this pace, the price-earnings ratio is justifiable. However, a look at the quarterly year over year revenue and earnings numbers reveals that revenue growth is slowing rapidly.
Quarter | 2023-03 | 2022-12 | 2022-09 | 2022-06 | 2022-03 | 2021-12 | 2021-09 | 2021-06 |
Revenue $millions | 209.72 | 208.14 | 216.14 | 212.85 | 205.44 | 195.29 | 192.32 | 188.86 |
2.1% | 6.6% | 12.4% | 12.7% | 19.1% | 17.9% | 21.1% | 33.3% | |
Net Income (Continuing Operations) | 14.21 | 17.79 | 18.11 | 10.83 | 8.9 | 8.84 | 13.29 | 14.49 |
59.7% | 101.2% | 36.3% | -25.3% | -38.8% | -43.5% | -62.9% | -12.9% |
This slower growth raises the risk of multiple compression.
ALRM Data by
Wall Street is more positive on this stock than I am, predicting on average a 24.1% increase in the stock price in the next 12 months. However, Wall Street's past record for Alarm.com has been overly bullish. They want to get people to buy stocks, as that's what makes Wall Street its money.
From a medium-term technical analysis view, the company does appear to be forming a bottom. The 50-day Simple Moving Average is converging with the 100-day SMA, but the 200-day SMA is still heading down. The Relative Strength Index (RSI) is in neutral territory.
ALRM Data by GuruFocus
Conclusion
Alarm.com has a solid track record of revenue and earnings growth, with a good balance sheet. The company is generating earnings and cash flow. However, revenue growth is slowing.
I believe the company may also become an acquisition target for the internet platform giants who are looking to expand into home automation and security. While the company appears to be a good value compared to its past growth, the numbers show that growth is slowing and the valuation is a little high. Thus, it may be prudent to wait for a better entry point.
This article first appeared on GuruFocus.
