Alarm.com trades at $56.51 per share and has stayed right on track with the overall market, gaining 12.7% over the last six months. At the same time, the S&P 500 has returned 11.7%.

Is there a buying opportunity in Alarm.com, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think Alarm.com Will Underperform?

We’re passing on Alarm.com for now. Here are three reasons why there are better opportunities than ALRM, plus one 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 $277.7 million in Q2, and over the last four quarters, its year-on-year growth averaged 8.7%. 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 4%, a deceleration versus its 9.1% annualized growth for the past five years. This projection is underwhelming 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 have 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 12.8%.

Final Judgment

We see the value of companies addressing major business pain points, but in the case of Alarm.com, we’re out. That said, the stock currently trades at 2.9× forward price-to-sales (or $56.51 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are superior stocks to buy right now. We’d recommend looking at one of our all-time favorite software stocks.

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