Secure Your Portfolio With Alarm.com

| About: Alarm.com (ALRM)

Summary

The home security business is expected to reach a market size of $15 billion in 2018.

Alarm’s revenues grew at 46% CAGR over the last four years.

Cloud-based services and IoT will further propel growth.

Alarm.com Holdings Inc. (NASDAQ:ALRM) is a company dealing with connected home security and technology. It enables home and business owners to secure their properties through automation and control of an array of connected devices through a user interface. The company was founded in 2000 and since then has revolutionized the way home security works. Alarm has more than 2.3 million residential and business subscribers and has connected more than 25 million devices till date. The company provides several other services in addition to just securing one's home. It also is successfully increasing its footprint outside of North America and building new technologies. With IoT and cloud-based services improving, there is an incremental market opportunity for the company. People today prefer to pay a premium for well managed security systems compared to old traditional security systems.

Though the company suffers from huge competitive pressures, I think it is in a good position to capture market share. It can leverage from its new product offerings and strategic partnerships. I would look at buying on dips.

Products and services

Smart devices are connected and controlled through a single mobile app, providing better security and advanced automation. The company provides interactive security solutions for homes and businesses through a series of products and cloud-based services including interactive security, intelligent automation, video monitoring and energy management.

Alarm.com provides secure communications and advanced tamper-resistant technology. Through the mobile app, one can check in anytime and arm or disarm his system remotely. Its video monitoring allows live streaming of a property's video on the smartphone. Triggers can be set to receive alerts for different activities. Other than controlling thermostats, lights and sensors through a single app, Alarm.com also seamlessly integrates door locks and garage door controls to its platform.

Click to enlarge

In a nutshell, the company enables controlling one's entire system through one app.

ALRM Positives

1) Improved business results - Alarm.com increased its subscriber base from a mere 0.5 million in December 2010 to 2.3 million now. Total revenue increased 26% on a yearly basis to $54 million and net income was $3 million in Q3 2015. It also beat analyst estimates of $47.5 million. SaaS and license revenue increased 27% to $36 million for the Q3 2015, compared to $28.5 million for the Q3 2014. The total revenue guidance for the full year also increased, as can be seen from the table below. The company also has a healthy SaaS and license revenue renewal rate of more than 90%.

Guidance (in $ million)

Q4'15

FY 15

Previous FY '15 guidance

Saas & License revenue

37.7-37.9

139.9-140.1

138.9-139.3

Total Revenue

197.7-200.1

193.9-195.3

Click to enlarge

Data from ALRM PR

2) Customer friendly platform - Alarm's user interface is simple and easy to operate and accessible from any mobile device. It can be personalized to suit the individual consumer's needs. Even if the security system is not armed, continuous monitoring with notifications is enabled. The platform supports a wide range of devices, thus providing seamless integration. It also supports a wide range of communication protocols used at homes including Z-Wave, Wi-Fi and ZigBee, as well as cellular and broadband. Customers are ready to pay a 25% premium for a professionally monitored system over the cost of a basic security system, according to Parks Associates.

3) Advanced Technology - Alarm.com's wireless Image Sensor captures a picture when motion is detected, thus enabling at-a-glance visibility into what's happening at home. Alarm.com also released a smart home app for the Apple watch. During the third quarter, the company launched Voice over LTE to enable direct communications in case of an emergency. Alarm also modified its solutions to detect water leakages.

4) New deals and huge market opportunity - Alarm.com has been looking beyond North America for future growth opportunities. The company announced a strategic partnership to launch Alarm.com's cloud-based security and automation services with Securitas in Europe. Securitas is the second-largest security company in the world, with 50% of its sales from residential and commercial operations across Europe. Another partnership was announced with Pronet, a leading electronic security company in Turkey with more than 200,000 subscribers. These deals will help Alarm.com to expand its international footprint.

"Security services are driving the adoption of smart home technology today and partnering with a global brand like Securitas is a strong fit for our international strategy," said Reed Grothe, Alarm.com Senior VP of Global Business Development.

Source: ALRM PR

According to a Juniper Research report dated February 2014, the global opportunity for home automation and security is expected to grow from $6 billion in 2013 to $15 billion in 2018, representing a CAGR of 21%.

Risks

a) Global macroeconomic risks - The global macroeconomic situation is fraught with danger as the Chinese economy may face a hard landing leading to a sharp global slowdown. Europe also is not looking in good shape, while Japan's growth has also been tepid. This coupled with the monetary issues due to zero interest rates has made the overall environment quite volatile. Alarm's valuation and stock prices could come under sharp pressure if the global equity markets decline due to these risks.

b) Competition is very high - The home security business is quite competitive. Any new technology might pose a threat to Alarm's business. There are competitive pressures not only from budding start-ups but also from technological giants, broadband and security service providers. HomeKit by Apple (NASDAQ:AAPL) and Nest labs by Google (NASDAQ:GOOG) (NASDAQ:GOOGL) have added tremendous pressure on Alarm. With Vivint Solar (NYSE:VSLR) and NRG getting into their own smart-home platform, pressure has been rising from all fronts.

c) Revenues depend upon service providers - Any inability of service providers in attracting new subscribers or retaining old ones will adversely affect ALRM's business, since the company relies on its service provider network to grow SaaS and license revenue.

Stock performance and valuation

The stock is currently trading at $16, ~14% above its initial public offering price in June 2015. It is just 20% shy of its 52-week high price of ~$20. The stock has returned more than 28% in the last three months. The market capitalization value stands at ~$730 million. The company is still in its early phase it does not make sense to talk about its PE. The P/B stands at 4.4x and P/S stands at 3.2x.

Conclusion

A majority of broadband households are interested in smart home features and Alarm.com is the largest connected home platform. The advent of smartphones, IoT and cloud-based technology have driven the adoption of connected homes. Alarm.com comes with a host of services for home security systems, including interactive security and energy management. The company is keeping at the forefront of change by expanding in different geographies and innovating new products. The company has a huge market opportunity at hand and will leverage from new product offerings. I would look at buying the stock on dips.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.