Although the S&P 500 is down 1.9% over the past six months, Alarm.com’s stock price has fallen further to $58.82, losing shareholders 14.5% of their capital. This might have investors contemplating their next move.
Is there a buying opportunity in Alarm.com, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Alarm.com Not Exciting?
Even though the stock has become cheaper, we're swiping left on Alarm.com for now. Here are three reasons why you should be careful with ALRM 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 $239.8 million in Q1, and over the last four quarters, its year-on-year growth averaged 6.6%. 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 4.2%, a slight deceleration versus its 6.9% annualized growth for the past three years. This projection doesn't excite us and indicates its products and services will see some demand headwinds.
3. Low Gross Margin Reveals Weak Structural Profitability
For software companies like Alarm.com, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.
Alarm.com’s gross margin is worse than the software industry average, giving it less room than its competitors to hire new talent that can expand its products and services. As you can see below, it averaged a 65.7% gross margin over the last year. That means Alarm.com paid its providers a lot of money ($34.32 for every $100 in revenue) to run its business. 
Final Judgment
Alarm.com isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 3.5× forward price-to-sales (or $58.82 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Would Buy Instead of Alarm.com
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