Since August 2024, Alarm.com has been in a holding pattern, posting a small loss of 0.8% while floating around $63.87. The stock also fell short of the S&P 500’s 16.9% gain during that period.

Is there a buying opportunity in Alarm.com, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

We're sitting this one out for now. Here are three reasons why there are better opportunities than ALRM and a stock we'd rather own.

Why Is Alarm.com Not Exciting?

Founded in 2000 as a business unit within MicroStrategy, Alarm.com (NASDAQ: ALRM) is a software-as-a-service platform that enables users to control their security systems and smart home appliances from a single app.

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 $241.6 million in Q3, and over the last four quarters, its year-on-year growth averaged 6.9%. 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 4.7%, a deceleration versus its 8.7% annualized growth for the past three years. This projection is underwhelming and suggests its products and services will face some demand challenges.

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 substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 65% gross margin over the last year. That means Alarm.com paid its providers a lot of money ($35.05 for every $100 in revenue) to run its business.

Final Judgment

Alarm.com isn’t a terrible business, but it doesn’t pass our quality test. With its shares trailing the market in recent months, the stock trades at 3.9× forward price-to-sales (or $63.87 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at the Amazon and PayPal of Latin America.

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