Alarm.com Holdings, Inc. (ALRM), which offers a suite of cloud-based solutions for smart homes and businesses, is known primarily for  features in its operating system that allow people to control their homes or business remotely. By combining its software and hardware technologies, the company has been able to offer innovative security solutions for the past few years. However, its stock  has lost 21.1% so far this year to close yesterday’s trading session at $81.66.

Furthermore, the stock is currently trading lower than its 50-day and 200-day moving averages of $88.83 and $87.42, respectively, which indicates that it is in a downtrend.

In January, ALRM priced an offering of convertible senior notes. It plans  to use the proceeds to repay all its outstanding borrowings and for acquisitions and/or strategic investments. Also, according to a Yahoo Finance report, ALRM’s CEO Stephen Trundle sold 45,634 shares of the company on May 11, 2021, which could be concerning.

Here are the factors that we think could influence ALRM’s performance in the coming months:

Consistent Product Innovation

ALRM launched its Connected Car system in March in collaboration with vehicle telematics solutions pioneer CalAmp Corp. (CAMP). The system  offers all the benefits of a vehicle monitoring solution in addition to the unique benefit of deep integration with ALRM’s  smart home security system.

The company  also released its first commercially available Touchless Video Doorbell in January. The product  is a great addition to its  portfolio amid the pandemic because it does not require physical contact with the doorbell, which  makes home visits and deliveries a little safer. The company also developed Flex IO in January. It is a battery-powered device that is weatherproofed for outdoor durability, uses the latest LTE-M technology to operate anywhere there is LTE coverage and without a panel, hub or even Wi-Fi. The one-of-a-kind sensor works as a standalone solution or as an expansion of a person’s existing Alarm.com powered system.

Robust Financials

For its fiscal first quarter, ended March 31, ALRM’s revenue from the SaaS and license segments increased 16.8% year-over-year to $107.38 million,  while its revenue from Hardware and other segments increased 8.5% year-over-year to $65.12 million. Its operating income for the quarter came in at $15 million, up 52.1% year-over-year. The company’s non-GAAP net income increased 23.9% year-over-year to $25.84 million. Also, its non-GAAP EPS was  $0.50, representing a 19% year-over-year rise.

Stretched Valuation

In terms of forward non-GAAP Price/Earnings ratio, ALRM’s 49.89x is 105% higher than the 24.34x industry average. In terms of forward P/S, the stock’s 6.11x is 44.1% higher than the 4.24x industry   average. Also, its forward EV/S and forward EV/EBITDA of 5.77x and 31.06x, respectively, are higher than the 4.08x and 16.57x industry averages.

POWR Ratings Don’t Indicate Sufficient  Upside

ALRM has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, ALRM has a C grade for Value, which is justified given its higher-than-industry valuation ratios.

It also has a C grade for Growth. This is consistent with analysts’ expectations that its revenue will increase 10.7% in its fiscal year 2021 but that its EPS will decline 4.9% for the current quarter, ending June 30and 22.4% for the quarter ending September 30.

The stock has a D grade for Momentum, in sync with its 21.3% loss over the past three months and 10.6% loss over the past month.

ALRM is ranked #41 of 64 stocks in the Home Improvement & Goods industry. Click here to access ALRM’s ratings for Stability, Sentiment and Quality also.

Better than ALRM: Click here to access several top-rated stocks in the same industry.

Bottom Line              

As an established leader in the interactive security market, ALRM has generated significant returns over the past few years based on its innovative solutions. Its revenue and EPS have increased at CAGRs of 21.3% and 31.5%, respectively, over the past three years. However, the stock has lost 10.6% over the past month and its EPS is also expected to decline in the coming quarters. With  these factors in mind, the stock looks significantly overvalued. So, we think it is best  to wait for a better entry point.

ALRM shares were trading at $81.99 per share on Thursday morning, up $0.33 (+0.40%). Year-to-date, ALRM has declined -20.74%, versus a 10.52% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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