THE HEDGEYE EDGE
Alarm.com Holdings (ALRM) engages in the provision of wireless and web-enabled security system technology. The company offers security, video monitoring, and energy management solutions. It operates through the Alarm.com and Other segments. The Alarm.com segment represents cloud-based platform for the connected home and related connected home solutions. The Other segment focuses on the research and development of home and commercial automation; as well as energy management products and services.
The outlook for Alarm.com is very mixed. The plus is that they are the R&D lab for the industry and they get paid for it. The negative is that they believe AMZN/GOOGL are part of a different market (DIY versus monitoring), and they are falling for the industry’s pivot away from residential (i.e. core business) into small and medium businesses.
Peel away some of the layers of Alarm.com’s business and you quickly find less good stuff like lackluster non-M&A growth, or fast growth in subs but little translation into revenue or operating cash flow.
On the not-so-hot side, ALRM has a high concentration of clients, clients made increasingly nervous by a rapidly changing market landscape, and ALRM is a mismatch as long term savior with both unimpressive product cadence + innovation, but also with an economic model that pits them as owners of the subscribers (rather than as a contracted software provider).
The Vivint exit from the platform perhaps shows the justification for grabbing that original position as owner of subscriber versus software provider (much higher economics) however, investors take note, the risk profile of serving this industry as an owner of subscribers places ALRM squarely in the disruption path and the inflated economic position will be vulnerable.
Net, the risk profile on this asset is high, the valuation doesn't make it easy, and on balance this stock shifts from 'previewed Bullish' to strongly Bearish.