You Need To Know This IPO

I am always on the lookout for the next hot stock and investing idea.  My interest in the market is 24/7, so even when I am having fun, I am thinking about potential investment ideas and companies.

bestbuy home automation

I recently visited BestBuy to purchase a case for my laptop.  On the way to the back of the store, I passed by a large section of the sales floor that I had not seen previously.  This section was dedicated to home automation.  I could not believe the multiple companies and devices that are dedicated to this new idea.  Home automation is the ability to control your dwellings systems either automatically or remotely from a smartphone, tablet or computer.

Seeing all the different products in BestBuy and knowing that for the retailer to dedicate so much valuable floor space to the sector must mean that there is substantial demand, therefore, profits to be made.

This realization caused me to look deeper into home automation for investment potential.  During my research, I discovered a new home automation IPO that is set to create substantial profits for investors.

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Not to mention that I love the potential of hot IPO’s.  This is particularly true when there are several mega-trends that the IPO is riding.  In this case, the mega-trends include the improving housing market.  The multi-decade low in housing was set during the 2008/2009 financial crisis.  While it may be a slow, erratic climb back to the highs, there is no question that real estate is in a long-term upward trend.

The next mega- trend is the smartphone and connectivity trend.  Without boring you with the numbers, suffice to say, smartphones and even wearable devices have become a ubiquitous part of society.  All one needs to do is observe any group of people.  Nearly everyone is carrying or using some internet connected device.

Add in the desire to save money and the environment by having better control of energy usage and the powerful consumer convenience craving and it paints an extremely bullish picture for home automation technology.

First, let’s take a closer look at the home automation business itself.

As you might imagine, the industry is led by the tech and electronic giants like Honeywell and Google, who recently acquired the start-up home automation company Nest.  Along with the big guns, there is a host of startups and smaller firms in the space.

homeautomation growth

The reason for this massive influx of companies is the fact that home automation is a enormous and rapidly growing market.  It has been around for quite some time, but as my foray into Best Buy made clear, it has just recently moved into the mainstream.  Research supported my observations with the leading market data and research firm, marketsandmarkets.com explaining the growth this way:

marketsandmarkets

 “The global home automation and control market was worth $5.77 billion in 2013 and is expected to reach $ 12.81 billion by 2020; the market is projected to grow at an estimated compound annual growth rate (CAGR) of 11.36% between 2014 and 2020. Even though the concept of home automation has been in existence for a long time, the market has witnessed a profound growth, mainly, during the last five years. The growing awareness about wireless technologies and the various developments related to the integration of wired and wireless technologies is expected to propel the home automation & control market in future.

North America is expected to retain its position as the largest market. The revival of construction activities, especially with regards to new residential buildings and renovations, is expected to support the growth of the said market, in this region. The increasing preference of consumers for convenience, connectivity, safety & security, and demand for energy efficient and green product solutions are expected to drive the growth of this market. Energy management and HVAC automation systems too are supposed to see a similar growth phase, during the forecast period. High investments in building infrastructure and the need to lower power consumption to save energy are further expected to drive the demand for home automation & security systems, especially in Asia-Pacific, Europe, and North America.”

Wow, talk about a powerful endorsement for the future of home automation!

I want to tell you about a new IPO that’s poised to be a very profitable player in the home automation arena.

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The company is Alarm.com (Nasdaq:ALRM).

Alarm.com just went public on Friday, June 26 with 7 million shares priced at $14.00 per share.  It raised $98 million from the stock issue.

While the IPO is new, the company was launched 15 years ago as a division of MicroStrategy’s Research & Development segment.  The company led the drive to offer cloud-based automation for home and business owners.

The company describes itself as the leading cloud-based platform for the connected home. Millions of home and business owners depend on its technology to intelligently secure their properties and automate a broad array of connected devices through a single, intuitive user interface. Interactive security, intelligent automation, video monitoring and energy management solutions are delivered exclusively through an established network of trusted service providers.

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Right now, the company boasts a solid foundation with 2.3 million residential and business users.  Also 5000 active providers distributing the service.

Alarm.com’s growth has been impressive with year over year revenue growth.  Just in the first quarter of 2015, revenue rocketed from $369 million to $46.0 million, a 24.9% increase.   Between 2012 and 2014, revenue climbed sharply from $96.5 million to $167.3 million.  Net income advanced from $8.9 million to $13.5 million over the same two-year time frame.

Drilling little deeper into the numbers indicates Alarm conveyed revenue of $167.3 million in 2014, up 28% from 2013, and displayed net income of $13.5 million. For Q1, the company posted revenue of $46 million, up 25%, and net income of $3 million.

The company had $39.5 million in cash at the end of the first quarter 2015.

It is important to note that the venture firm, Technology Crossover, has a 38.2% equity stake in the company presently.

The company’s business model is to sell hardware via its distributor base and earn continual revenue from service subscriptions.

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Alarm has an aggressive growth strategy that includes upgrading traditional security clients to connected home solutions and international expansion.  Also, the company is actively pursuing acquisitions to ramp up its market penetration and growth.

Shares of the stock climbed over 20% on the day of the IPO.  However, the Greek default triggered market meltdown early in the first full week of trade resulted in shares pulling back just over 5%.

As with all IPO’s it’s critical to note the lockup expiration date.  This is the time that insiders are permitted to sell their newly minted shares.  Alarm.com’s lock-up period expires on 12.23.15.   IPO’s often sell off when this date is hit as insiders may be looking to cash out for a variety of reasons.  Depending on how the shares react up to and through the lock-up period, an excellent buying opportunity can be created when the lock-up expires.

Right now, the smart trade is to wait for the price to violate $17.00 per share to enter longs.  This confirms upside momentum and helps protect buying if the selling inexplicitly continues longer than expected.

Wise investors will wait patiently to enter the stock on the long side.  Waiting for either a break out as suggested or a further decline makes sense right now.  Remember, IPO’s can be volatile prior to finding a longer term directional trend.  Patience is your friend in this case.