Alarum Technologies Q2 Results: Don't Snooze This Alarm

seekingalpha08-31

I see Alarum Technologies Ltd.’s 12x forward EBITDA as potentially misleading, given its slowing growth and customer concentration risks.While the company’s strong cash position is reassuring, it ...

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href=https://seekingalpha.com/article/4718232-alarum-technologies-q2-results-dont-snooze-this-alarm><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>I see Alarum Technologies Ltd.’s 12x forward EBITDA as potentially misleading, given its slowing growth and customer concentration risks.While the company’s strong cash position is reassuring, it ...</p>\n\n<a href=\"https://seekingalpha.com/article/4718232-alarum-technologies-q2-results-dont-snooze-this-alarm\">Source 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PORTFOLIO \"AD\" (HKD) INC","BK4566":"资本集团","TWLO":"Twilio Inc","BK4524":"宅经济概念","BK4535":"淡马锡持仓","BK4559":"巴菲特持仓","BK4527":"明星科技股","IE00B19Z8X17.USD":"FTGF CLEARBRIDGE US LARGE CAP GROWTH  \"AG\" (USD) ACC","BK4116":"互联网服务与基础架构","BK4588":"碎股","LU1720051017.SGD":"Allianz Global Artificial Intelligence AT Acc H2-SGD"},"translate_title":"Alarum Technologies第二季度业绩：不要暂停此警报","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"TWLO":1,"ALAR":1,"FSLY":1},"content_text":"I see Alarum Technologies Ltd.’s 12x forward EBITDA as potentially misleading, given its slowing growth and customer concentration risks.While the company’s strong cash position is reassuring, it doesn’t fully offset the volatility of its usage-based model.I’m cautiously optimistic about a possible rebound later this year, but I need to see more stability before considering a buy.For now, I’m holding off on Alarum Technologies, as the risks still outweigh the potential rewards.Hazal Ak/iStock via Getty Images Investment Thesis Alarum Technologies Ltd. (ALAR) has hit a rough patch. This is a company that took investors by storm in 2024, with its share price up more than 1,000% at one point. However, now Alarum Technology has lost its momentum. And even though the stock looks cheap, at approximately 12x forward EBITDA and with 20% of its market cap made up of cash, I remain neutral on this name, as I've done for some time. Rapid Recap Alarum is a business with a fanatic shareholder base. You can see this much from the analysts who follow this business. Meanwhile, I have been decidedly cautious about Alarum, on concerns that investors' expectations were too far ahead of themselves, see below. SA To echo my stance, in my previous analysis, I said,  Undoubtedly, the stock has the illusion of being cheap. But I believe that paying 10x cash flow for ALAR is merely an illusion of being cheap, which will end up as a costly mistake. Alarum is set to report its Q2 2024 results in full next Monday, August 26th premarket. And I recommend investors avoid this stock.  author's work on ALAR As you can see above, I've been consistently cautious of investing in Alarum. It's not that I had more visibility than anyone else, it's simply that I believed investors' expectations were running too hot. Accordingly, I recommend that investors don't buy this dip. At least not yet. Alarum's Near-Term Prospects Alarum Technologies focuses on providing Enterprise Internet Access solutions, primarily through its flagship service, NetNut. The company's offerings include IP proxy networks and data collection products like the Web Unblocker and AI Data Collector, which cater to major global companies. Alarum has seen significant growth in its revenue, driven by its robust infrastructure and expanding customer base, with NetNut being the primary revenue generator. In the near term, Alarum net retention rates fell from 1.66 in Q1 to 1.59 in Q2 and likely lower in Q3 due to lower usage from some customers. More on its growth rates and net expansion soon. And yet, despite this near-term headwind, Alarum noted on its earnings call that it expects a rebound, with revenues projected to grow in the latter part of the quarter, driven by the retention and expansion of its customer base. Nonetheless, Alarum faces challenges, including fluctuations in customer usage and market dynamics that have led to temporary revenue dips. The competitive nature of the IP proxy and data collection sectors also presents headwinds. And of course, the biggest risk that I've discussed numerous times already, both in the articles and in the comments section, is the company's reliance on a few large customers. This poses a significant risk if any reduce their usage or switch to competitors. Given this background, let's now discuss its fundamentals. Revenue Growth Rates Fizzle Out ALAR revenue growth rates Here's a quote from my first analysis of Alarum back in June,  I'm experienced enough to recognize the issue with this business model. Its growth rates are predominantly driven by a usage-based business model. And I know that usage-based business models work tremendously well for a while until they stop working.  Even as the stock was rapidly moving higher, I stated that my experience saw its potential downfall way before it was \"clear\" and priced into the market. Above we can see Alarum's guidance for fiscal Q3 2024. The company points to about 5% topline growth, but I've assumed that management is being conservative with its guidance. Nonetheless, the graphic above clearly shows that Alarum's revenue growth rates are slowing down. Why is Alarum's growth rate slowing down so rapidly? There are two parts to this answer. Firstly, the issue is that only a portion of Alarum's business is attractive, namely those associated with its NetNut business. Meanwhile, the remainder of the business is shrinking, so it drives the consolidated growth rates to slow down. Secondly, even though many analysts have stated that it is management's choice to run a consumption model, I knew from watching many companies over the years that consumption models don't work. They are too volatile. You can think about Fastly (FSLY) to Snowflake (SNOW) to Twilio (TWLO). Take your pick. Why don't consumption models work? Because you are putting yourself on the opposite side of the table to your customers. You are basically saying to your customers, \"use our service, and you'll get left with a spiked bill at the end of the month.\" Who wants that? That's why Netflix (NFLX) is a success. Because it promotes binge-watching. Not a pay-per-view model. To support my argument, here's a quote from the Q2 earnings call: So in the middle of Q3 some of our customers slow down their usage and that's what we call a drop or a kind of a dip that made them to renew or not to renew in the next month, meaning in June, for example, or in July. Even if they renewed, they bought a much smaller packages from bandwidth perspective. And this is why you see these revenues are going back. With this context in mind, let's now discuss its valuation. ALAR Stock Valuation -- 12x Forward EBITDA Alarum guides for about $1 million of EBITDA in Q3. Even if management is being highly conservative and its EBITDA figure comes in at $1.5 million, this is still 20% lower than the same period a year ago. Now, to complicate matters further, think about this. The first half of 2024, when Alarum's profitability was higher than already booked in $6.7 million of EBITDA. Accordingly, it's fair to say that Alarum's underlying profitability is weakening with time. Consequently, I estimate that in the next 12 months, Alarum is on a forward EBITDA run-rate of around $8 million. This implies that this stock is priced at 12x forward EBITDA. Is that a bargain? I don't believe so, particularly when you consider that in the near-term, its revenues are growing at approximately low double digits. On the other hand, not everything is a blemish here. After all, Alarum holds very approximately 20% of its market cap as cash and cash equivalents and essentially no debt. The Bottom Line Alarum Technology's rapid rise has hit a snag, with slowing growth and reduced usage from key customers. While its current valuation at 12x forward EBITDA might seem cheap, it's not compelling enough given the underlying volatility in its usage-based model and the significant risk from customer concentration. The company's strong cash position and potential rebound in the latter half of the year offer some optimism, but these factors alone don't outweigh the challenges. Moving forward, unless Alarum Technologies Ltd. can stabilize its revenue streams and diversify its customer base, it's too early to sound the alarm for a buy.  Editor's Note: This article covers one or more microcap stocks. 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