Why Alarm.com Can Deliver Stock Price Growth
Alarm.com Holdings Inc. (NASDAQ:ALRM) could produce a stock price recovery following its 27% decline over the past year.
The home security company is investing in new products that could improve its efficiency and competitive position. It may also benefit from previous acquisitions that complement its products and services.
OpenEye acquisition
The company's acquisition of video surveillance business OpenEye in third-quarter 2019 could catalyze its financial performance. The acquisition provides Alarm.com with greater access to the lucrative commercial video surveillance market, since OpenEye has a customer base that includes major national retailers, banks and property management companies.
In addition, OpenEye provides a subscription-based video surveillance service. Many of its customers pay a subscription for its services, which provides OpenEye with reliable recurring revenue. This could help to make Alarm.com's sales more resilient and broaden its appeal to companies that do not wish to make a large upfront investment in the latest video surveillance technology.
In its third-quarter earnings report, Alarm.com said it believes its acquisition of OpenEye could complement its existing services. The business is investing in its video analysis service, which can be integrated into OpenEye's existing services. This could strengthen the combined company's range of products and help to differentiate it from competitors. Additionally, it may increase Alarm.com's chances of winning new business and boost its sales performance.
New products
Alarm.com has a solid pipeline of new products that could strengthen its competitive position. For example, it launched two new residential video cameras in the third quarter. They offer better picture quality than its previous video cameras and are compatible with its latest analysis software. The new cameras have updated antennas that increase their reliability compared to rival products.
The company also launched a new device in the third quarter that provides a secure and private Wi-Fi network for its video cameras. It will reduce the amount of time it takes for the company to install its video cameras and improve the reliability of its products. This may lead to Alarm.com experiencing greater customer satisfaction levels and generating efficiencies that catalyze its financial performance.
Potential threats
The company has experienced higher costs due to tariffs being imposed on its imports from China. Alarm.com reported in its third-quarter results that it absorbed these additional costs, which put pressure on its margins in fiscal 2019. Should tariffs remain on the goods that the business imports from China, they could cause its financial performance to deteriorate. Investor sentiment towards the stock could decline if its financial prospects become less favorable due to the higher costs.
Despite tariffs causing Alarm.com's costs to rise, its third-quarter financial performance showed an improvement compared to the same quarter of fiscal 2018. The company's revenue grew 14.3% compared to the prior-year quarter, while its gross margin increased to 62.8% from 62.5% in 2018.
The company's energy management segment could boost its sales and help it to overcome the negative impact of tariffs. For example, it launched a new service in the third quarter that monitors heating, ventilation and air conditioning units. The service remotely identifies potential faults with HVAC systems and alerts a qualified technician who fixes them. The system can improve the reliability of HVAC units through pre-empting potential faults, and could further differentiate Alarm's services versus those of its peers.
Outlook
Market analysts forecast Alarm.com will report a 49% increase in its earnings per share for fiscal 2019. The forward price-earnings ratio of 31.9 suggests that it has stock price growth potential in the coming years.
Disclosure: The author has no positions in any stocks mentioned.
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This article first appeared on GuruFocus.
