Alarm: An Underappreciated Growth Story

Summary

• Alarm is an attractive growth stock that targets an ever-growing market for technological property management solutions.
• The company is attractively valued at just 7x EV to Sales and is seeing expanding profitability margins.
• Despite a fragmented automation market, Alarm has built a competitive edge through its cloud-based platform, allowing for data scalability.

Overview

Alarm (NASDAQ:ALRM) had a good year in 2020, as the pandemic forced people to stay at home, translating into increased demand for smart home solutions. As a result, shares are up by a staggering 120%, widely outperforming the broader market. While shares are have dropped roughly 20% from all-time highs in January, the dip may be an excellent opportunity to buy an undervalued technology player that continues to grow at impressive rates, despite facing looming competition in a market that is set to expand rapidly throughout the next few decades.

Source: Aspen Electronic Systems

The platform Alarm.com offers a wide range of cloud-based solutions for smart homes, and businesses, including interactive security, video monitoring, intelligent automation, and energy management. Despite slowly decelerating revenue growth since its IPO in 2015, the company is still seeing solid growth on the top and bottom line, quickly expanding its subscriber base. Thus, when accounting for future growth aspects and net profit margins, Alarm might continue to reward investors as the company still appears undervalued.

Growth Continues

Alarm reported robust Q4 earnings at the end of February, as Alarm beat both revenue and EPS figures. Revenue came in at $165 million, beating the consensus estimates by almost 14 percent and EPS of 0.45 vs. 0.27, representing a surprise factor of 68%. In its SaaS and license segment, revenue increased by 17% compared to a year earlier. At the same time, the company is mightily balancing growth and profitability, reporting adjusted net income of $16 million.

We are pleased to report solid results for the quarter and the year, our service provider partners and the Alarm team continued to perform at high levels despite the ongoing pandemic. During the year we delivered a breadth of innovative new platform capabilities for both our residential and commercial services, including the Smart Water Valve + Meter, Connected Car, Flex IO, the AlarmTouchless Video Doorbell and OpenEye's SaaS application for commercial customers, which will help our service provider partners extend their leadership positions in multiple markets. -CEO Steve Trundle

Source: Macrotrends

More impressively, Alarm added some 800 thousand new paid subscribers in 2020, a notable acceleration from just 700 thousand between 2018 and 2019. It is therefore Alarm's quickest subscriber expansion since 2016. As a result, revenue accelerated in FY 2020, growing by 23% to $618 million, as opposed to 19% in 2019. It's also worth mentioning that free cash flow from operations expanded to $102 million, despite an acceleration of revenues. In terms of outlook, Alarm is calling for revenue of roughly $105 million in Q1 and $665 million for FY 2021. While the guidance is slightly disappointing, representing a growth rate of just under 10%, I believe these estimates are rather moderate and might easily be topped, considering solid growth in subscribers.

Attractive Valuation

Data by YCharts

Despite rallying over 100% in 2020, Alarm continues to trade at a discount when taking into account its growth rates, margins, and overall growth in the home automation market. That said, Alarm trades at just 7x EV to Sales, significantly lower than peers Autodesk (NASDAQ:ADSK), Splunk (NASDAQ:SPLK), and Ansys (NYSE:ANSS). While Alarm has the lowest margins on the list with just 63%, it shows the highest growth rates. Thus, both Autodesk and Splunk are valued at a premium of nearly 100%, trading at around 15x sales. On a forward basis, Alarm is trading at just 4 times projected 2023 sales. Even on an earnings basis, Alarm trades at a P/E of just 50, and 22x projected earnings in 2023. That figure further reiterates strong financial fundamentals, considering other growing tech companies are struggling to be profitable at all. Moreover, Alarm is trading at just 42 times free cash flow in 2020.

Huge Market - but competitive

Both the residential and business sector offers gigantic market opportunities and serve as a catalyst for more growth in coming years. As mentioned earlier, Alarm already powers 7.6 million properties in 2020, while some 24 million U.S homes currently utilize professionally monitored security. However, there are 140 million homes in the U.S, offering a huge runway for further subscriber expansion. In the business sector, Alarm can address a market of roughly 4 million properties through its security and energy optimization solutions. Here, the global smart security market offers Alarm a TAM of $14 billion, growing at a CAGR of 24% to $21 billion in 2023.

The global building automation system market size is projected to grow from USD 73.5 billion in 2021 to USD 112.1 billion by 2026; it is estimated to grow at a CAGR of 8.8% during the forecast period. The growth of the building automation system market is fueled by the increasing requirement of energy-efficient facilities with enhanced security systems. Besides this, advancements in wireless communication technologies have lessened the complexity and the cost of installing building automation systems in the existing buildings.

Source: Business Wire
However, a quickly growing market also attracts a number of competitors, a partial reason for Alarm's undervaluation. Notable competitors in the space include Telular Corporation, SecureNet, and United Technologies Corporation. Despite a fragmented market, Alarm has been to strongly position itself by scaling its subscriber base and service provider partners. By doing so, Alarm has processed over 30 billion data points and connected 35 million devices since its inception. Thus, the data scalability of its cloud-based platform gives Alarm a crucial competitive advantage in the market.

Takeaways

Alarm appears to be under the radar for many growth-focused investors. While not being an ultra-growth stock, Alarm has seen an acceleration of revenues in 2020, as more homes and businesses adapted Alarm's security and automation solutions. The company is targeting an ever-growing market, yet faces stiff competition from larger established firms with higher liquidity. However, through its cloud-based platform, it builds its competitive edge by scaling and integrating collected data. Even after rallying 120% YOY, Alarm appears attractively valued, at just 7x forward sales.

On the other hand, investors should weigh various risks. Despite an attractive valuation and favorable fundamentals, the recent tech sell-off demonstrated that no company is invulnerable to a downside correction. Still, as of right now the stock deserves to be at least on the watchlist.

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.

All predictions and projections are solely median estimates by financial analysts and are due for uncertainty. All graphs, charts, etc., may not be up to date and only represent the latest available data. I do not guarantee the accuracy for any of my mentioned price targets, and thus, they should not be used as investment advice.