We think that Microsoft’s stock (NASDAQ: MSFT) currently is a better pick compared to Alarm.com’s stock (NASDAQ: ALRM). Microsoft’s stock trades at about 13.4x trailing revenues, compared to around 5.9x for Alarm.com. Does this gap in the companies’ valuations make sense? We believe so. While both the companies have seen revenue growth despite the pandemic, Alarm.com has struggled to maintain its operating margin which has fallen post 2019. Alarm.com has seen stronger revenue growth but Microsoft isn’t that far behind. However, there is more to the comparison, which makes Microsoft a better bet than Alarm.com at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard Alarm.com Holdings vs Microsoft: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. Alarm.com Wins On Revenue Growth
With Microsoft’s fiscal year ending in June, its ongoing FY is 2022 while Alarm.com’s is 2021. If compared on the basis of the past three years, Alarm.com trumps Microsoft in revenue growth. Microsoft’s revenue was recorded at $168.1 billion in the last twelve months period compared to $110.4 billion in FY 2018 (a jump of 52%). On a comparable basis, Alarm.com’s revenue was recorded at $685.8 million in the last twelve months period compared to $338.9 million in FY 2017 (a rise of 102%), nearly double the growth as that in Microsoft’s revenues. Further, for the most recent quarter (Q4’21 for Microsoft and Q2’21 for Alarm.com), Microsoft’s revenues jumped 21.3% YoY, while Alarm.com’s jumped 33.3%.
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Notwithstanding, the faster revenue growth of Alarm.com, Microsoft is a much larger company with more than 245x the revenue of Alarm.com. This makes Microsoft’s revenue growth more impressive and hence makes it a better bet.
2. Microsoft Clear Winner On Margins
Microsoft’s EBIT margins were 41.6% in the last twelve month period compared to 31.8% in FY 2018. In comparison, Alarm.com has seen its margins drop to to 8.0% over the last four quarters from 9.2% in FY 2017. While the dent in Alarm.com’s margins has been set off by the revenue growth, Microsoft on the other hand, has been seeing consistent EBIT margin growth in line with the jump in revenues.
The Net of It All
While Microsoft’s trailing revenue multiple stands higher than that of Alarm.com, it has seen stellar growth in revenues and operating margins compared to Alarm.com. Looking at the post-Covid recovery, overall Microsoft has fared better than Alarm.com. Microsoft’s EBIT has improved to 41.6% in the last twelve months from 37% in the previous year, while Alarm.com’s EBIT margin fell to 8% in the last twelve months from 8.7% in the previous year. A improvement in EBIT margin and much higher revenue base for Microsoft offset’s Alarm.com’s better revenue growth of 22% in the last twelve months compared to 17.5% of Microsoft. Further, Microsoft’s P/EBIT ratio of 32.2x is significantly cheaper than Alarm.com’s 74.5x, despite a higher P/S ratio of 13.4x vs Alarm.com’s 5.9x. We believe Microsoft has the potential to keep riding ahead, supported by strong financials and the gap in valuation could further widen over time. As such, we believe that Microsoft is currently a better buying opportunity compared to Alarm.com stock.
While MSFT stock is likely to move higher in the near term, there are several peers in its sector that look like a Better Bet Than MSFT Stock. Also, Microsoft Peer Comparisons summarizes how the company fares against peers on metrics that matter.