Campbell: These systems are complex. I don't know to what degree you've installed any of these things in your own home, but I've gone through and I've done a couple of little things here and there, and you're trying to get them all to communicate to one another, and it's like, oh my God.
Lewis: You mentioned the market opportunity, Todd. I think the home security market might not be something people are super familiar with. What does that look like? And what kind of presence does Alarm.com currently have?
Campbell: I was a little bit surprised. This number shocked me a little bit. There are 22 million homes in America that have security systems in place. Twenty-two million. That seems like a lot to me. What's really interesting about that is, of those 22 million, not very many, 30%-40% of them, I'll call smart homes. But how smart are these homes really? We're still very early in this whole smart-home movement. Right now, we're really controlling the temperature, the climate, that kind of thing. It's not as smart as it will be in 10 years. But a very small percentage of those 22 million are smart homes, but Alarm is already working with about 5 million of these homeowners, which is pretty impressive to me, given the fact that they were working with 1 million back in 2012.
Lewis: That smart-home stat, there are a lot of different things that can qualify as a smart home. Having something like Nest, it could be a smart-home product, or it could be kind of a more integrated, full security system, like some of the stuff that Alarm.com partners with.
Campbell: I was kind of hinting at this earlier. You have all these players like Nest and Z-wave and all these other things out there, and the idea is, you've got all these different devices. How do you get them all to work and play nicely together? Everybody's got an Echo inside their house now, and they're using -- I won't use the word, because our listeners tell us that it actually triggers it to turn on -- the name of the device when we ask it to do something.
Lewis: That's very courteous, Todd.
Campbell: Yes. I like to try to help out our listeners whenever possible. But you're able now to access Alarm.com through your Echo to be able to do things like say, "Dim my lights 30%." Or, "Hey, I'm a little chilly. Can I get the air conditioning to drop down another 2 degrees?" Or something like that. So it's really become far more than just, "I'm securing your home, and if someone breaks a window I'm calling the police." You're now able to use all of this real-time data that's being collected and discover all sorts of information about what's going on around your home. I don't know about you -- I may have snuck out once or twice when I was a kid.
Lewis: Of course, yeah.
Campbell: Alarm.com is going to make that a lot more difficult for the teens of today.
Lewis: Parents, take note. Todd, what are some of the numbers like for this company? We talk about how small-cap companies tend to be big growth opportunities. How do the financials look?
Campbell: We're talking about a fast-growing company. Revenue on a compounded annual basis, it's grown about 28% since 2012. In the second quarter, sales were up 33.5% to $86 million. It's not a Goliath company. It's a small-cap company. But it's growing rapidly. If you look at the way that their revenue breaks down, Dylan, most of it is coming from higher-margin software, gets about 40% of its sales from that, or a little bit more. And its guidance for 2017 is for 25% year-over-year growth -- nothing to complain about there; $326 million, at least, in sales. And about $1.00 in earnings per share, too. So it's profitable. So you have a company that's growing double digits, generating profit for investors, in a really, I think, attractive market.
Lewis: And something that I think is kind of a major trait of most small-cap stocks is, they don't necessarily trade for kind of "reasonable," quote-unquote, valuations on a P/E or price-to-sales basis. At a $2 billion market cap, this is obviously a company that's priced for growth. But when you're looking at what might be in front of it, that's what you're paying for, right?
Campbell: You're going to end up paying, typically, on a price-to-sales multiple, you're going to pay up 7 to 12 times sales for these fast growers. The thing that you have to remember, though, is that if you get a company that's growing 20% annually, you know, the revenue is going to double in five years. So, you really do have to think about the potential, how big the market could be, and then figure out what a fair value is. If you say, "OK, you know, maybe it's worth 5 times sales in five years, and sales are going to double, maybe it's worth $3 billion, or $4 billion." Some of these are puts and takes that you're going to have to consider when you consider how big the market opportunity is versus how much you're willing to pay up to buy the stock.
Lewis: And that plays into the overall volatility that we see with a lot of these companies. It's very difficult to forecast out what a market might look like, and a lot of people have different estimates and different expectations for what a company could grow into. And because of that, as a company reports earnings, maybe the picture pans out as they expect, maybe it doesn't, there will be major corrections with the stock price accordingly.
Campbell: Yeah. You have risks. You have competitors out there who have been in the market for years and years and years, like ADT, etc. And they're not going to just give up this marketplace easily. So competition could increase. You've got technology evolving so rapidly, and who knows, how is Amazon going to try? Could they, at some point, leverage Echo to try and home in on this market? Who knows. So there are some risks. Investors need to remember that.