Alarm.com Downgraded On Valuation By Imperial Capital

The bullish case for AlarmCom Hldg Inc ALRM has come to an end despite a widening competitive moat with underappreciated revenue opportunities, according to Imperial Capital.

The Analyst

Imperial Capital's Jeff Kessler downgraded Alarm Holdings from Outperform to In-Line with a price target lifted from $45 to $60.

The Thesis

Alarm Holdings is building a suite of multiple business lines and partners that should create an even larger competitive advantage versus its peers over time, Kessler said in the downgrade note. (See the analyst's track record here.)

Some of the company's opportunities aren't fully appreciated by investors, including the small-to-medium size business market opportunity, which could exceed $20 billion in five years, the analyst said. 

A recent partnership with Toll Brothers Inc TOL shows Alarm Holdings' commitment to broaden its customer base to include homebuilders, Kessler said. 

Imperial Capital's revised $60 price target is based on a 7x multiple on a fiscal 2020 SaaS and license venue estimate and 1x fiscal 2020 hardware and oher revenue estimate. The premium multiple is warranted given the company's ability to succeed in multiple new businesses over time, but also implies an upside case of around 4 percent from current levels — which no longer meets the criteria for a bullish stance on the stock, Kessler said. 

Alarm Holdings has proven to the investment community it can command high valuations consistent with its closest SaaS peers in related industries, the analyst said. But the stock's strong gains since bottoming at $37.29 in late June puts an end to Imperial's bullish case for the time being.

Price Action

Alarm Holdings shares were trading 0.6 percent higher at $54.92 at the time of publication Friday. 

Related Links:

Alarm.com: 4 Reasons Why Imperial Capital Turned Bullish

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

Photo courtesy of Alarm Holdings.