I have been very encouraged by the operating leverage Alarm showed in the September quarter. As I said in a previous post:
This one is hiding in plain sight: the high margin of the SaaS revenue is just starting to show up – Q3 was a big inflection point. No one seemed to notice – the stock is actually down quite a bit. You can see it by simply looking at the operating income:
MAR JUN SEP DEC
2016 4.3 2.8 2.8 4.2
2017 4.5 5.9 10.4
*If so see something I'm missing, please let me know, but it looks to me like Alarm is turning into an Arista-like profit machine right under everyone's nose.*
That Arista bit wasn’t intended as hyperbole. I really think they can repeat their September performance and even improve, churning out more and more profit through leverage. But is there more to the story? Am I missing something? I must admit, as a product, I don’t really understand what makes Alarm special. Also it seems that competition is all around, and potential competition even more so. I know that not many of you on the board have gotten interested in this one, and so I ask:
If you’re not interested in Alarm, why not? Do you disagree about the financials? Or do you simply foresee headwinds due to competition? Or something else?
If you are interested or even own Alarm, what are your thoughts about the company’s threats? Mine are simply that they seem to be growing steadily, the SaaS revenue (with 93% retention rate) is encouraging, and that perhaps they have enough of a niche and good enough relationships with the home security companies that their growth will continue at a reasonable (though not other-worldy) pace. Do you agree or see it differently?
I have a small position via June '18 options. I recently learned that Amazon has acquired Blink, a competitor. Maybe that is keeping a lid on Alarm price.
I recently started a small position in Alarm. It was due in part to multiple consecutive “Best Buy” recommendations in a paid Fool service. The steady growth, and apparent switch to more recurring revenue due to monitoring and integration services (as opposed to the one-time sale of hardware) were enough to take that small position. As I mentioned in a different thread, I’m more comfortable starting small and letting the winners show themselves and grow into larger positions by virtue of winning. That makes it much easier for me to try things in the face of doubt.
The company name seems misleading, as they seem to be about more than just alarm (security systems). They’re more of a “smart home” business, like Nest. Every once in a while, I think I’d like a “smart” or automated home, but the products never seem to be enough to be worthwhile. Also, in years past, it seems to be mostly proprietary systems and smart remotes (“scene controllers”). I think it will take more interoperability to really make the technology worthwhile. Maybe that’s some kind of standardization in the communication protocols the devices use. Maybe it’s a sufficiently open platform (like Apple’s HomeKit) that allows the proprietary systems to link to, so they can work together. It seems like Alarm is trying to be that cooperative middleman.
“If you are interested or even own Alarm, what are your thoughts …”
I own some ALRM and significantly more ANET. I think highly of both, but the following contrasts explain (in part) why my holdings of ANET are significantly more than my holdings of ALRM.
Operating margin 32% ANET, 12% ALRM (performance)
Return on assets 23% ANET, 16% ALRM (performance)
Return on investment 34% ANET, 20% ALRM (performance)
Long term debt/equity 3% ANET, 31% ALRM (risk)
Income/employee 252k ANET, 52k ALRM (efficiency)
(data from Fidelity)
Speaking as an alarm.com user (indirectly, I use Frontpoint, which is based on Alarm’s platform), I’m just waiting for a good HomeKit-integrated alternative, with full-service monitoring, to switch. Looks like SimpliSafe is leaping ahead here. I think if you’re in this space and you’re not looking at Alexa, Google Home and HomeKit integration you’re going to be falling behind.
Thanks to everyone for your thoughts on Alarm .com. They definitely have some competition out there. I’ll be keeping a close eye on them, and update the board, as always.