Alarm.com is a Virginia-based company that specializes in the connected home market. The company specializes mainly in surveillance and security and is now getting into the energy management and wellness businesses. The company claims that is has more than 5.5 million subscribers with a monthly subscription rate that ranges from $3 to $15 per month.

Alarm.com generated nearly $400 million in sales last year with 70% of these sales coming from the SaaS subscription segment (SaaS can be used on Alarm’s and 3^rd parties hardware) which has an 85% gross margin. The other 30% are coming from the company’s hardware sales (Alphabet’s Nest is the main competitor in this segment), a segment which management is giving less importance to as it is moving to a subscription-only business.

The company is free-cash-flow positive with minimal capital spending needed for ongoing operations. We believe that the company is an appealing acquisition target as retailers (mainly Amazon and Walmart) are trying to get into the consumer’s house (Amazon acquired Ring.com, a direct competitor to Alarm.com, for $1 billion six months ago).

Regarding valuation, we believe that the stock is cheap at current levels with a room for a 25-50% upside. The company has a market cap of $2 billion but we believe its 5.5 million subscribers have a current value of $900 million, or 45% of the company’s value. We derived to the $900 million figure by assuming an annual renewal rate equal to historical rate of 93%, a 2% annual inflation rate, and a 10-year subscription period. This means that the growth segment of the company has a current value of $1.1 billion which we believe is cheap as the connected home market is rapidly growing with a room to add more than 15 million subscribers and Alarm’s huge investment in R&D ($70 million annually, or 20% of sales) should payoff.

We passed through several researches written by Wall Street’s top analysts about Alarm.com. Nearly all analysts have an outperform rating with more than $52 per share PT implying a minimum of 18% return over the next 12 months.

As part of our subscription service, we share Wall Street reports about our picks with our subscribers:

Michelle Nemeroff’s Credit Suisse has an “outperform” rating with a $52 per share price target (and a $60 per share blue-case scenario). Press here to get access to the full report.

Bhavan Suri of William Blair & Company also has an "outperform" rating with a $54 per share price target. Press here to get access to the full report.

What Market OutPerformers thinks

What Market OutPerformers thinks

 We believe that ALRM stock is cheap given the company's growth potentials and the absence of any financial pressure (the company generated $40 million in FCF last year and has a history of FCF generation). This makes the stock unique as most SaaS providers face short-term pressures in achieving financing. We believe that the stock should trade at a premium to the average SaaS multiple (7.2 EV/Sales vs 5.4 for ALRM) and not at a discount. We estimate that the stock should trade at 8 times its 2018 revenues which makes the company's valuation in line with Apptio, an SaaS provider with similar growth rate to that of ALRM but with much lower FCF and a history of burning (not generating) cash annually. This makes our PT equal to $63 per share (40% upside), a figure even higher than that of the most bullish analyst in Wall Street.