William Blair: Could Amazon's Ring Acquisition Create A Smart Home Alarms Race?

AlarmCom Hldg Inc ALRM reported 27-percent revenue growth and a strong increase in non-GAAP earnings per share from 19 cents to 26 cents after the close Tuesday. SaaS and license revenue climbed 39 percent to $65.2 million.

Notwithstanding the good fourth-quarter results, one analyst said Amazon.com, Inc. AMZN's Ring acquisition could become an overhang for Alarm.com.

The Analyst

William Blair analyst Bhavan Suri has an Outperform rating on the shares of Alarm.com.

The Thesis

Subscription revenue, revenue, EBITDA and non-GAAP earnings per share were all above consensus estimates, Suri said in a Tuesday note. 

The $3-million cut to the upper end of the 2018 revenue guidance was due to a higher mix of subscription revenue carrying a materially higher gross margin than hardware, the analyst said.

The 2018 adjusted EBITDA guidance implies a 40-basis point margin expansion at the midpoint compared to 270 in 2017 and 200 in 2016.

With some flow-through effect from the lower U.S. tax rate, Alarm.com guided 2018 non-GAAP earnings per share to $1.12-$1.14, ahead of the 98-cent consensus estimate, Suri said. 

William Blair attributed the lukewarm guidance to the company's conservatism, although it sees scope for subscription revenue guidance moving higher if the Alarm.com executes well.

"Further, we believe that the EBITDA guidance is conservative to give the company flexibility with investments, and revenue upside should drop down to earnings at a fairly healthy rate." 

Concern around DIY smart home and security offerings was already elevated before Amazon's Ring acquisition, as reflected by the substantial ad spending on these products over the holiday season, Suri said. 

William Blair sees the need to sell more products — and secure the font of a house to ensure safe delivery — as motives behind the Amazon purchase.

Though the Ring acquisition does not materially change the firm's investment thesis for Alarm.com, it could pressure the stock through additional negative sentiment around the DIY threat, Suri said. 

"One positive is that a potential arms race in the smart home space could make Alarm.com an attractive acquisition target." 

The Price Action

Shares of Alarm.com were up about 31 percent over the past year through Tuesday. 

The shares were slumping 4.69 percent to $36.38 at the time of publication Wednesday afternoon. 

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Photo courtesy of Alarm.com.