Over the past six months, Alarm.com’s stock price fell to $43.83. Shareholders have lost 9% of their capital, which is disappointing considering the S&P 500 has climbed by 11.6%. This may have investors wondering how to approach the situation.
Is now the time to buy Alarm.com, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Alarm.com Will Underperform?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why ALRM doesn't excite us and a stock we'd rather own.
1. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Alarm.com’s billings came in at $267.2 million in Q1, and over the last four quarters, its year-on-year growth averaged 8.4%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Alarm.com’s revenue to rise by 3.6%, a deceleration versus its 10.2% annualized growth for the past five years. This projection doesn't excite us and suggests its products and services will face some demand challenges.
3. Operating Margin in Limbo
Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
Analyzing the trend in its profitability, Alarm.com’s operating margin might fluctuated slightly but has generally stayed the same over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 13.1%.
Final Judgment
Alarm.com doesn’t pass our quality test. Following the recent decline, the stock trades at 2.2× forward price-to-sales (or $43.83 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better stocks to buy right now. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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