Up 80% Since Late March, Is The Rally In Alarm.com Stock Over?

After an 80% rally since the March 23 low, at the current price of around $69 per share we believe Alarm.com’s stock (NASDAQ: ALRM) has reached its near-term potential. Alarm.com, a market leader in home security and automation, has seen its stock rally from $38 to $69 off the recent bottom compared to the S&P which moved around 45%. Its stock is beating the overall markets by a margin, as the home security and automation market hasn’t been affected much by the Covid-19 pandemic and investors are positive about its growth. Notably, the company’s stock is up 60% from levels seen in late 2019.

Alarm.com’s stock has surpassed the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, demand and revenues will likely be lower than last year. While the company has had steady revenue and earnings growth over recent years, its PE multiple has decreased. We believe the stock is unlikely to see a significant upside after the recent gain and the potential weakness from a recession driven by the Covid outbreak. Our dashboard ‘What Factors Drove 82.7% Change In Alarm.com Stock Between 2017 And Now?’ has the underlying numbers.

Some of this rise of the last 2 years is justified by the roughly 48% growth seen in Alarm.com’s revenues from 2017 to 2019, which translated into an 83% growth in Net Income figure. This unusually high growth could be attributed to the drop in total operating expenses as a % of revenues from 56% in 2017 to 53% in 2019 as well as to a jump in non-operating income (interest income and other).

Alarm.com’s PE multiple changed from 60x in 2017 to around 39x at the end of 2019. While the company’s PE is around 62x now, there is a downside when the current PE is compared to the figure at the end of 2019.

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So what’s the likely trigger and timing for the downside?

Alarm.com is a leader in the home security and automation market. It provides smart devices – software and hardware solutions that enable residential and commercial properties to connect to the internet. Due to the ongoing crisis, the company’s supply chain and sales channel have suffered, affecting its operations. Further, the economic slowdown will make it hard for the company to generate new sales. On the flip side, Alarm.com has a high renewal rate and it generally signs multiyear contracts with its home customers, which acts as a cushion to its top line. While the Q1 2020 results saw some revenue growth, we believe that the second-quarter revenues in July will likely be lower than the first quarter.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.

While Alarm.com’s stock might not currently offer a promising proposition to potential investors, could investing in debt-laden, down-but-not-out companies yield large upside post-Covid? Find out more in our analysis: The Leveraged 5: AAL, CTL, COTY, OXY, HOG.

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