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Arlo Technologies: What A Disappointment


  • Arlo Technologies sparked my interest as a potential arbitrage opportunity since it went public in a spin-off from Netgear.
  • I was attracted to the strong growth, amidst lacklustre margins, and I am very glad that I passed on the shares in the IPO.
  • Ever since trends have been dismal, amidst a real plunge in sales and margins, I see no triggers despite a very low valuation.
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Arlo Technologies (NYSE:ARLO) has proven to be nothing but a disappointment for investors ever since the company has been spun-off from former parent company Netgear (NTGR). In August, I wondered if Arlo offered security solutions at a safe price, as I concluded to remain cautious despite cheap sales multiples in relation to its growth, on the back of real concerns about margins.

The main reason why I was interested in Arlo at the time was the potential arbitrage opportunity which presented itself between Arlo and Netgear, as that spread never became compelling enough to initiate a position in the spread. I am glad that I have passed on this "opportunity" as recent quarterly results, and notably the 2019 outlook are nothing short of a real disaster. The lack of insight and realistic guidance by management so "early" following the spin-off, and a very competitive and difficult marketplace make this a rather easy avoid for me. This comes despite the rock-bottom valuation and relatively large net cash balances, as the extent of the problems is simply very large.

Arlo - The Business

Arlo is a hardware producer which combines cloud infrastructure with its mobile app in order to create connected devices for consumers and businesses. These clients use Arlo's devices and solutions to protect people and property which they care about. Typical applications include cameras, security cameras, monitors and security lights, among other other applications.

After being launched in 2014, Arlo has rapidly shipped millions of devices and in fact millions of users have registered themselves across the globe. With costs of Wi-Fi systems and RF connectivity being cheap and constantly available, the solutions of Arlo come at low costs, as compatibility makes it an easy solution for consumers as well.

The Old Thesis

The spin-off of Arlo took place through

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This article was written by

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The Value Investor has a Master of Science with specialization in financial markets and a decade of experience tracking companies via catalytic company events.

As the leader of the investing group Value In Corporate Events they provide members with opportunities to capitalize on IPOs, mergers & acquisitions, earnings reports and changes in corporate capital allocation. Coverage includes 10 major events a month with an eye towards finding the best opportunities. Learn more.

Analyst’s 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.

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Comments (6)

The suitor that makes the most sense for a BO in my opinion is Apple. Arlo’s market share and approach to market is superior features, premium quality, and service focused. Their design even closely aligns with Apple. Apple has a small gap in their ecosystem in the camera device area and Arlo would fit very nicely and for a very cheap price. Apple could spend 1/300th of their cash reserves and buy this to satisfy the gap in their HomeKit ecosystem rather than letting google or amazon try to take it with Nest/Ring. They could then continue to dabble more in the IOT home connected devices.
Going to $4.40
Hard to put a specific value on the stock right now. $9? $4? Worthless? Really, hard to say. But if you consider the risk/reward, a couple things stand out: First, the 60% or so drop in the last 2 weeks does not seem to be a strategic price change based on known fundamental values, but rather an irrational/emotional response by the market. That is to say, this seems like a big time overreaction. Now, it's still hard to price that. But we can predict that as long as the company doesn't fail, a corrective regression (in this case progression) to the mean is very likely. Second, they've got cash. Sure, it could run out. But for now, they've got it, which means if their product is worth anything (and I believe many think it is), they've got some time to turn this around.

Big time risk/reward right now. You could lose your money by 2022. Or you could see a 50% ROI in 9 months.
Going to $4.40
Freemind12 profile picture
Buy now as price reflects uncertainty. Arlo has products which people want and that will make this company come back. Downside is limited at this point and any near term improvements will lead to big rewards. Who knows even PE might be interested at this price.
Crashbuyer profile picture
I agree there is no reason at this time to do anything about ARLO but harvest all losses for tax purposes and watch from the sidelines to see management's continued execution or lack thereof. If there is a buy-out, so be it but what is the buy-out price? the buyer would be buying into competition from larger players who seek these end markets assiduously. If there is no buy-out, a need for additional capital by, say, 2020 can be surely satisfied but at a cost by some dilution. At what price would be the public secondary? Most likely a private placement by 2020 perhaps of convertibles and even coupled with warrants but, again, at what price? After the Raymond James analyst ferreted out the cash burn of ARLO, Mr. Market hates uncertainty.
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