The COVID-19 pandemic has created a bifurcation in the stock market between companies that have suffered from the stay-at-home order (travel, retail, restaurants, etc.) and companies that have not been greatly affected or have benefited from it (e-commerce and essential services). Home security and automation company Alarm.com (ALRM -1.45%) appears to fall into the category of businesses that are not greatly affected. This has been reflected in its stock's positive year-to-date price performance. Should investors expect Alarm.com's stock to continue rising?
Home security and automation on the rise
Alarm.com sells software and hardware for connecting residential and commercial properties to the internet. The largest use case of the company's service is home security. The proliferation of smart devices in homes (part of the Internet of Things) has led to more applications of the technology as well. Property owners can use the company's software to lock the front door, close the garage door, lower the air conditioning temperature, or monitor the home with video surveillance.
The addressable market for home automation is quite large with plenty of untapped potential. Of the 144 million homes in the U.S. and Canada, 24 million already use professionally monitored security systems, according to data the company presented. Alarm.com currently has 6.8 million homes on its platform, giving it a leading market share position.
The vast majority of Alarm.com's business comes from the residential property market, but the company has been investing in solutions for commercial property owners as well. Commercial property owners have slightly different needs -- for example, they often manage several properties as opposed to a single home. The company believes it has a strong growth opportunity in this market in the coming years.
Image source: Getty Images.
Business is staying stable
Alarm.com makes software and sells hardware, but it sells its products through independent security companies. Alarm.com has partnered with over 9,000 security companies that are responsible for managing the customer relationship, including installation of hardware and responding to alarms sent out by the system.
The company's business model lends itself to being quite stable as home security customers generally sign up for multiyear contracts and have a high renewal rate. Alarm.com has reported a customer renewal rate of 93% or 94% for each of the last five years.
During its first-quarter 2020 earnings call in May, the company noted that it had not seen a significant uptick in cancellations and that new installations were running at around 70% of normal. In other words, the company was operating fairly close to "normal" during the height of the stay-at-home orders in the United States. Therefore, investors have good reason to believe that the company's business will snap back promptly and may not see a major effect on its earnings.
An essential service
Alarm.com has a few things going for it right now. First, the company is a leading player in the growing home security and automation industry. Investors can continue to expect solid top-line growth as more consumers adopt its products. Second, demand for the company's products have so far proven to be resilient.
It makes sense that Alarm.com has continued to thrive in this environment. In a world of social distancing, many want the ability to use technology to operate more remotely. For example, you may want to use a door speaker to tell a delivery person to leave an item at a doorstep. Alternatively, if you are a property manager, you may need to monitor locations that do not have staff present.
Once you have a certain level of security, you might be less likely to downgrade. Alarm.com simply makes it easier to manage a property and provides functionality that you didn't know you needed.
