Trailing the market

The S&P 500 was up around 20% in 2017, but there are still pockets of value. The market has risen somewhat steadily and was up more than 6% in the fourth quarter alone. But not everything has been shooting to the moon…

Wix
Share price is below the Feb 28 closing price.
Meanwhile, TTM revenue in 2016 was 290M, expected 2017 revenue is 424M.

Alarm .com
Share price is roughly the same as the Jun 30 closing price.
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.

Shopify
As much as it seems Shopify is richly valued, consider that at the close on May 31, shares were only 10% cheaper than they are right now.
Meanwhile, their 389M in 2016 revenue is dwarfed by the 658M they’re expected to haul in for 2017. (Of course it will be even more.)

It is interesting to me how much these companies have steadily grown since February, May, and June, while their stock prices have not. Even if you say the companies were overvalued then and the stock prices have simply cooled off, you have to admit, the companies’ performance has not cooled, thus making them a better buy now.

Bear

25 Likes

Bear, what I have for ALRM in terms of adjusted earnings per share, which should reflect operating income to a large degree, is :


2015:             14   14
2016:   13   15   19   19
2017:   23   33   27

To me, and to others I presume, that looks like they had great year-over-year earnings comparisons in the first two quarters and then, in the third quarter, they had a sequential 18% drop in earnings from 33 cents to 27 cents, while the year over year comparisons went from


 36% growth in the Dec quarter of 2016, to 
 77% growth in the Mar quarter of 2017, to
120% growth in the Jun quarter of 2017 

and then in the Sep quarter it looked like they dropped off a cliff, with the sequential drop, and year-over-year EPS gains dropping from 120% the quarter before, back down to 42% in Sept.

That’s probably what is causing the price drop. Am I misreading something?

Saul

3 Likes

Sorry Bear, I found the problem with a little research about that out of line 33 cent EPS in the second quarter, which made the third quarter look bad:

GAAP net income and Non-GAAP adjusted net income in the second quarter of 2017 included a $4.5 million tax benefit due to additional research and development (R&D) tax credits and a favorable impact from the new accounting standard for [stock-based comp] during the quarter.

GAAP has to include that stuff, but honest adjusted results probably shouldn’t have included it. That just made second quarter results look much better than they were. GAAP would always present it like that. They have to. But Adjusted should have said 24 cents instead of 33 cents. Then we have a more reasonable progression from 23 cents, to 24 cents, to 27 cents.

Saul

5 Likes

Yep, Saul, you found it faster than I could respond. They basically messed up so non-GAAP didn’t tell the story like we’re used to, which is why I used Operating Income.

Seems to me they’ve been running “profitably” – but only cranking out a dime or two per share up until now, because OpEx had been growing too. But OpEx went down sequentially in Q3, and I just have a feeling they can let the profits start flowing to the bottom line.

Bear

1 Like

Hi Bear,

This is great post. I like all three you mentioned. I have Alarm for a while now and up 50% as of today.

On the growth, I believe last year they had a major acquisition reflecting into their growth. Street should be expecting them to be back in slow growth mode. I have had extensive discussions with one of their competitors- it’s very lucrative market and there are many well resources companies (including Comcast and other telcos) going after it. Although it’s big market, the pace of customer acquisition is slow.

Alarm certainly is a leader and partner with many big names as well. So my conclusion on Alarm is its great, long term holding - but I don’t expect fast revenue or share price ramp.

Wix on the other hand looks to me very “Shopify” like and may be even more.

Just my 2 cents…

Nilvest
(Holding all three - ALRM, WIX, SHOP)

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On the growth, I believe last year they had a major acquisition reflecting into their growth. Street should be expecting them to be back in slow growth mode. I have had extensive discussions with one of their competitors- it’s very lucrative market and there are many well resources companies (including Comcast and other telcos) going after it. Although it’s big market, the pace of customer acquisition is slow.

Alarm certainly is a leader and partner with many big names as well. So my conclusion on Alarm is its great, long term holding - but I don’t expect fast revenue or share price ramp.

Wix on the other hand looks to me very “Shopify” like and may be even more.

All good points and I agree Wix is a faster grower than Alarm. Put in context, though, Alarm is still growing nicely. Revenue for Jun Q (the first full quarter including the acquisition) was 59M SaaS and 27M hardware (86M total). In Sep it was 62M SaaS and 28M hardware (90M total). So still around 20% growth if they keep up that pace. More important to me is the leverage. Oper Margin was 10.50% in Jun and 17.89% in September. I see no reason they won’t be able to push into the 20-25% range easily (they reduced OpEx in Sep…not sure if they’ll continue to reduce or hold steady, but as long as it doesn’t jump up again, I like the trend). If I’m right about that EPS would be 1.50 or more in 2018…0.93 is expected. There’s a disconnect somewhere.

Bear

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