It’s been a treasure hunt trying to find stocks and sectors that are up this year. But what about security and monitoring services, like Alarm.com (ALRM)? Why should you add a smart security and video monitoring company to your portfolio?
This American technology company offers cloud-based services for complete home automation and control. The interactive service platform allows customers to manage their systems remotely, but is the stock a buy?
Founded over 20 years ago, Alarm.com may not be a very large company, per se, but it’s drawing attention among investors. The company’s stock saw significant share price movement this year, reaching over $76 a share in mid-August before falling to its 52-week low of $47.16 in November. This kind of volatility presents lots of opportunities for value-oriented investors who can spot a deal.
The question is whether its current price of around is a fair reflection of its actual value?
Reasons to Buy
A compelling reason investors might be interested in Alarm.com’s stock is its revenue trend over the past few years. The company has grown revenue quarter over quarter for 20 quarters consecutively. That is no small feat.
According to the company’s financials, FY revenues have increased significantly, from $502.4 million in 2019 to $618 million in 2020. In 2021, Alarm.com pulled in $749 million.
Based on the most recent earnings report, total revenue for FY2022 is expected to be in the range of $840.3 million to $842.5 million. That’s a significant jump from the company’s FY2017 total revenue of $338.9 million.
In Q3 2022, Alarm.com’s EBIT was over $20 million, supporting the revenue growth trend seen thus far. Overall, Alarm.com is fairly cash-rich with an impressive balance sheet.
While total cash and cash equivalents decreased to $621.3 million as of September 30, 2022, compared to $710.6 million as of December 31, 2021, the company purchased 840,249 shares of Alarm.com common stock.
Alarm.com reported a significant decrease in free cash flow this year compared to 2021, primarily due to increased purchased inventory to reduce supply chain risks and uncertainties. There were also differences in the timing of disbursements and the collection of receipts.
Despite this, Alarm.com’s share price has outperformed the S&P 500 for the last decade and continues to showcase strong business fundamentals.
Any Red Flags?
While even the most successful companies have debt, too much debt or poor money management can sink a company. Debt is a tool that helps businesses grow, but they must be capable of paying it off.
As of September 2022, the company had around $489 million in debt in addition to $621 in cash, resulting in $132 million in net cash. Keep an eye on these values, especially since insiders sold a substantial stake in the company this year — is there more to the story here that public investors have yet to learn?
It’s impossible to know so the best we can do is turn to a valuation analysis. Our calculations reveal a fair value of $66.81, suggesting a potential 35% upside when buying shares of ALRM.
Should You Buy Shares of ALRM?
If you invested in Alarm.com late last year, you experienced the stock’s bitter downturn in 2022. Returns have been less than satisfactory, making investors question the company’s fundamentals. The last three months have been particularly worrisome.
In contrast, long-term investors have fared much better. Over the past five years, share prices have been up over 32%. While Alarm.com may not have a massive market cap, it’s tough to ignore its significant and steady growth.
All things considered, shares of Alarm.com appears to be attractive. Some would even say shares are cheap, but could they drop even lower? Based on the stock’s relatively volatile history lately, share prices could sink lower. Examining the company through a fundamental lens, however, that would simply be a better deal than today’s already attractive prices.