Arlo Technologies Stock Is Turnaround Pullback Play

Smart connected device maker A rlo Technologies (NYSE:ARLO) stock has been largely “under the radar” as the turnaround takes shape. Arlo was spun off from NETGEAR (NASDAQ:NTGR) in 2018. Shares pretty much went straight down until bottoming out during the pandemic in March 2020.

The Company provides smart devices enabling security, safety, and monitoring solutions via internet-of-things (IoT) sensors and cameras. The Company is not as well-known as more publicized brands like Ring Video Doorbell acquired by Amazon (NASDAQ:AMZN), however, Arlo is one of the nation’s largest providers of smart security cameras. Its devices and artificial intelligence (AI) powered app provides peace of mind for work-at-home and in-office customers.

As the COVID vaccine rollout accelerates and workers return to the office, the Company should also see a recovery in top-line growth and continued growth in its subscription model. The recent earnings report reaction is providing opportunistic pullback levels for prudent investors looking for exposure in this turnaround recovery play.

On Feb. 23, 2021, Arlo released its fourth-quarter earnings report for the quarter ending in December 2020. The Company saw an earnings-per-share (EPS) loss of (-$0.08), excluding non-recurring items, versus consensus analyst estimates for a loss of (-$0.18), beating by $0.10. Revenues fell (-6.2%) year-over-year (YoY) to $114.8 million, beating analyst estimates for $111.57 million. Most notable was the impressive 72.1% YoY growth in subscription revenues and 89.1% YoY growth in paid accounts. The Company ended the quarter with $206.1 million in cash and no debt.

Arlo CEO, Mathew McRae, set the tone:

“During a tumultuous 2021… we refresh most of our product portfolio, we launched new service plans, we won more awards than any other time in our company history. We diversified our revenues through key partnerships, and we optimized business operations.”

CEO McRae continued to underscore financial improvements including growing GAAP margin by over 10% YoY, delivering $4 million in non-GAAP operating expense reduction and improving cash and cash equivalent short term investments by $12.5 million sequentially. The Company added 79,000 new paid accounts, up 36% sequentially from Q3 for a total of 435,000 paid accounts, up 89% YoY. Service revenues grew to $21.6 million, up 72% YoY driven by the focus on bolster subscriptions.

The 90-day Arlo Smart trial service comes free with the purchase of hardware has been the key to conversion. CEO McRae credited:

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“Arlo Smart is our best in class AI powered motion identification and security service, which enhances product capabilities, and transforms the user experience. Upon expiration of we have consistently see a 50% subscription attach rate to the paid service, a rate 10 times higher than our old business model.”

Old business model products were phased out in 2020 and nearly all products for 2021 fall under the new business model. The Company launched its wire-free video door bell product in Q4 and review.com called it, “The best video doorbell we’ve ever tested.” The touchless doorbell uses proximity technology to ring with a wave of the hand rather than physically pressing, to reduce the spread of pathogens and viruses. The Verisure European partnership deal milestone are being bet, which includes a $500 million hardware purchase minimum guarantee over five years from 2020 to 2024 in addition to paid accounts in the region.

It’s worth noting that insiders have purchased net 1.18 million shares in 2020 and 580,000 shares as of Jan. 29, 2021 in the current year. This is a bullish sign of confidence by insiders. Despite impressive growth metrics, shares spiked and sold back down to levels where prudent investors can consider building a position at opportunistic pullback levels.