Arlo: Scarce Value Play In An Expensive Market

seekingalpha06-21

Arlo continues to be an attractive value play that stands out in an expensive stock market.The company achieved tremendous Q1 results that showed strong services revenue growth.Sequential adds in both...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nArlo: Scarce Value Play In An Expensive Market\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-06-21 23:43 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4700380-arlo-scarce-value-play-in-an-expensive-market><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Arlo continues to be an attractive value play that stands out in an expensive stock market.The company achieved tremendous Q1 results that showed strong services revenue growth.Sequential adds in both...</p>\n\n<a href=\"https://seekingalpha.com/article/4700380-arlo-scarce-value-play-in-an-expensive-market\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"IE00B19Z4B17.USD","symbol_name":"LEGG MASON ROYCE US SMALL CAP OPPORTUNITY \"A\" (USD) ACC","start_time":0,"source_url":"https://seekingalpha.com/article/4700380-arlo-scarce-value-play-in-an-expensive-market","article_id":"2445951760","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1405489463/image_1405489463.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2445951760","pubTimestamp":1718984584,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Arlo continues to be an attractive value play that stands out in an expensive stock market.The company achieved tremendous Q1 results that showed strong services revenue growth.Sequential adds in both","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"IE00B19Z4B17.USD":"LEGG MASON ROYCE US SMALL CAP OPPORTUNITY \"A\" (USD) ACC","ARLO":"Arlo Technologies Inc.","BK4157":"电子设备和仪器","IE00B66KJ199.SGD":"LEGG MASON ROYCE US SMALL CAP OPPORTUNITY  \" A\" (SGD) ACC","IE0031619046.USD":"LEGG MASON ROYCE US SMALL CAP OPPORTUNITY \"A\" (USD) INC","IE00B7SZL793.SGD":"Legg Mason Royce - US Small Cap Opportunity A Acc SGD-H"},"translate_title":"Arlo：昂贵市场中的稀缺价值","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ARLO":1},"content_text":"Arlo continues to be an attractive value play that stands out in an expensive stock market.The company achieved tremendous Q1 results that showed strong services revenue growth.Sequential adds in both subscribers and ARR eclipsed even Q4, which had the benefit of holiday sales.The company is making strides toward its long-term targets of hitting ~10 million subscribers, ~$700 million in ARR, and 25%+ operating margins by 2030.Marcelo Trad/iStock via Getty Images As the stock market continues to defy gravity and soar to new all-time highs with little regard to both lingering macro headwinds and geopolitical tensions, it's wise for investors to slowly pivot away from risky momentum plays and rotate more into value. This doesn't mean giving up on growth entirely: but focusing on \"growth at a reasonable price\" stocks that are a bit out of the mainstream limelight. Arlo Technologies, Inc. (NYSE:ARLO), in my view, fits this bill perfectly. The security camera vendor continues to see double-digit revenue growth rates in response to strong sales of new products and strong attach rates on subscription accounts. Year to date the stock has already jumped nearly 40%, but given the company is hitting a growth inflection while still maintaining a modest valuation, I think there's still plenty of room for Arlo to rocket higher. Data by YCharts I last wrote a bullish opinion on Arlo in April, when the stock was still trading below $12 per share. Since then, despite the ~15% gains in the company's share price, Arlo has also compensated for its rally with terrific Q1 results that showed continued strength in net subscriber additions and gross margin leverage. Owing to this, I'm reiterating my buy rating on Arlo. We especially note that Arlo believes its Essential 2 camera, which starts at $69.99 and was launched in September of last year, has helped the company gain market share in the lower end of the market. As a reminder, the company has been playing with hardware pricing in order to entice more customers through the door, banking on high conversion rates to paid subscription accounts. As cumulative paid accounts continue to increase, we increasingly view Arlo as a services and recurring revenue story. We note as well that the company has aggressive long-term targets. By 2027, the company is targeting 5 million paid accounts and 10 million by 2030 (versus 3.2 million today); and from a profitability standpoint, it hopes to achieve a +25% pro forma operating margin by 2030, versus ~7% today. Arlo's long-term targets (Arlo Q1 shareholder letter) For investors who are newer to this stock, here is my full long-term bull case on Arlo:   A category leader in the security camera space with broad positive ratings- Arlo has been highly reviewed by major tech publications like CNET and PCMag and is considered one of the top home smart cameras. In addition to this, Arlo is one of the most prominent security companies to promote DIY installation vs. other cameras that require expensive technicians for installation.  Services revenue is growing quickly and eclipsing hardware revenue. Arlo is moving away from being a pure hardware products company. Paid subscriber accounts, now above 3 million customers, are growing at a ~50% y/y clip. Arlo also notes that ~65% of new hardware customers sign up for Arlo Secure within six months.  Favorable unit economics- The company touts an LTV to CAC ratio of 7x, justifying its recent push to reduce hardware prices and get more paid subscribers in the door.  Large addressable market- Arlo estimates the market for home security to currently stand at $53 billion, and it also expects a 14% y/y growth CAGR through 2029. With just over ~$500 million in annual revenue, Arlo has plenty of room to expand and innovate in this space. Given that there is no clear leader in the home security camera market, Arlo has a chance to take the crown.  Profitability- Unlike many small-caps of its size, Arlo has hit pro forma operating profitability, and its increased revenue indexing into services will further boost its margin profile.  Stay long here: there's plenty of upside left as Arlo continues to march toward its long-term targets. Q1 download Let's now go through Arlo's latest quarterly results in greater detail. The Q1 earnings summary is shown below: Arlo Q1 results (Arlo Q1 earnings deck) Revenue grew 12% y/y to $124.2 million, eclipsing Wall Street's expectations of $123.3 million (+11% y/y). Growth decelerated only slightly versus 14% y/y growth in Q4, and services represented 46% of the company's total revenue, six points better than 40% in the year-ago Q1. What was additionally impressive about the quarter was the fact that the company grew paid accounts by 430k sequentially in Q1, versus \"only\" 320k in Q4 - despite the fact that Q4 contains the critical holiday period in which hardware sales soar, typically bringing in a raft of new signups as well. Arlo subscribers (Arlo Q1 earnings deck) Similarly, the company added $17 million in net-new ARR in the quarter (versus $10 million in Q4) to end at $227 million, up 24% y/y. Recall as well that the company implemented subscription price increases last year, and has still managed to maintain churn rates consistent at ~1%. The company believes it's executing strong growth despite being held back by macro headwinds. Per CEO Matthew McRae's remarks on the Q1 earnings call:  Our strategy to accomplish these goals focuses on several areas. First is our retail and direct business, where we sell devices and service subscriptions to consumers. Last year, we rebalanced our pricing strategy by reducing hardware margins and increasing our service fees, which lowered the barrier of entry in a slower consumer market, driving share gains and faster household formation for Arlo. In the 2023 holiday period, our essential two product line performed well, especially at big box retailers, providing a clear indication that the DIY home security segment is entering the mass market. Along with helping us navigate a slower consumer climate in the near term, this shift in pricing opened a broader addressable market for Arlo and is a key dimension in our plans to continue our strong paid subscription growth leading to expansion of both our service revenue and profitability. Looking ahead, we believe the macroeconomic environment will remain muted in 2024. Thus, we plan to leverage the same strategy we executed last year, as we planned for the important back half of the year. While lower ASPs may bring down hardware revenue, we expect to benefit again from incremental growth in households and service revenue going into 2025. I'm excited to report that the strategy has already begun to bear fruit, as we have similar to last year a confirmed robust promotional calendar with some of the largest retailers in the world for this coming holiday season.\"  From a profitability standpoint, Arlo's pro forma operating margins increased 580bps y/y to 6.9%, now falling only three points shy of the company's 2027 target of over 10%: Arlo operating margins (Arlo Q1 earnings deck) Valuation and key takeaways Despite strong fundamental momentum, Arlo still very much remains a bargain play. At current share prices near $13, Arlo trades at a market cap of $1.29 billion. After we net off the $142.9 million of cash from the company's most recent balance sheet, Arlo's resulting enterprise value is $1.15 billion. Meanwhile, for the next fiscal year (FY25), Wall Street analysts are expecting the company to generate $567.8 million in revenue or +8% y/y - which puts Arlo's valuation multiple at just 2.0x EV/FY25 revenue. And even if we assign zero value to hardware revenue and ~50% of FY25 revenue is services (versus 46% this quarter), the stock would still only be at a ~4x revenue multiple: which is also quite modest for a company that hit a ~15% FCF margin and a ~7% pro forma operating margin this quarter.  All in all, there's plenty of fundamental firepower to support Arlo's rally: stay long here and hold on for more upside.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.28.1","shortVersion":"4.28.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2445951760"}