Increasing investments in innovation and efficiency could lead to improved growth prospects for Alarm.com Holdings Inc. (ALRM, Financial). The smart home and security services provider is introducing several new features to differentiate its products from rivals.
Although there are short-term risks ahead from increasing tariffs, the wider smart home industry’s long-term outlook remains attractive.
While the stock has risen 23% over the last year, it offers further scope for capital growth.
Innovation
The company’s continued investments in innovative features could enhance its competitive advantage. For example, in the most recent quarter, it integrated a feature into its enterprise console dashboard that allows customers with multiple locations to manage everything from one place. This will allow them to add and delete users, define schedules and manage access points from a single web view. It has also integrated live video into its enterprise console, enabling customers to manage and monitor video feeds from multiple geographic locations using a single interface.
Artificial intelligence is being applied to Alarm.com’s products in order to increase their differentiation versus peers. Its AI engine can intelligently detect and alert the right personnel regarding irregular or unexpected events. This could prove particularly useful for business customers that may have multiple locations, potentially requiring fewer employees to monitor their sites.
Sales of the company’s residential offering may be positively catalyzed by the addition of the Highlights feature. It provides an animated summary of important activity from a set time period, such as one day, and allows a homeowner to view the notable events that have occurred. It uses a proprietary algorithm that utilizes sensors in order to choose the key events that are then shown to customers. This is expected to enhance the customer experience and add further value for residential customers.
Growth strategy
Alarm.com subsidiary EnergyHub has the potential to grow through partnerships with utility companies such as Southern California Gas (SOCGP). In the most recent quarter, the two companies established the industry’s first demand response program, which helps to reduce natural gas consumption during peak periods while providing additional revenue for EnergyHub. The partnership is expanding to leverage more brands of thermostat that are integrated into the EnergyHub platform. Similar partnerships with other utility companies could be ahead due to the success of the relationship so far.
Alarm.com is also investing in simplifying the process of product installation to make it increasingly accessible to a wide range of customers. For example, it has automated the tests that ensure each sensor within its system is sending correct data to the monitoring station. Previously, this was a time-consuming process that had to be undertaken manually. By easing the process of installation, it may improve efficiency and reduce overall costs.
Threats
The ongoing trade war between the U.S. and China could weigh on the financial performance of the business. The potential for tariffs to be placed on all imports from China could negatively impact the company’s hardware products. Around a third of the finished hardware products it offers to service providers are imported from China. Although the tariffs put in place so far have had minimal impact on the business, the threat of further import taxes could cause investor sentiment to weaken in the near term.
Even though the short-term prospects for the business may be disrupted by the continuing trade war, the long-term outlook for the wider sector remains positive. For example, over the next four years, sales in the U.S. home security system market are expected to grow at an annualized rate of 10.4%. Similarly, the penetration of smart home devices such as thermostats and lighting is expected to rise from 33% in 2019 to 53% by 2023. This is expected to lead to a compound annualized growth rate in sales of 12% during the period.
Outlook
In fiscal 2020, Alarm.Com is forecasted to record 14% earnings per share growth. Though its forward price-earnings ratio of 39 is relatively high, the company appears to have growth potential in the long run.
The company's focus on innovation and efficiency could lead to a stronger competitive position within what is expected to be a fast-growing smart home market.
The growth potential of EnergyHub may provide an additional catalyst, as well as offer a degree of diversity.
Even though Alarm.com has risen 23% over the last year versus a gain of 3% for the S&P 500, the stock has long-term investment appeal.
Disclosure: The author has no positions in any stocks mentioned.
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