Buying shares in the best businesses can build meaningful wealth for you and your family. And highest quality companies can see their share prices grow by huge amounts. To wit, the Alarm.com Holdings, Inc. (NASDAQ:ALRM) share price has soared 309% over five years. This just goes to show the value creation that some businesses can achieve. The last week saw the share price soften some 4.7%.
To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).
During the five years of share price growth, Alarm.com Holdings moved from a loss to profitability. That kind of transition can be an inflection point that justifies a strong share price gain, just as we have seen here. Given that the company made a profit three years ago, but not five years ago, it is worth looking at the share price returns over the last three years, too. Indeed, the Alarm.com Holdings share price has gained 26% in three years. In the same period, EPS is up 40% per year. This EPS growth is higher than the 8.0% average annual increase in the share price over the same three years. Therefore, it seems the market has moderated its expectations for growth, somewhat.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
It's probably worth noting that the CEO is paid less than the median at similar sized companies. It's always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. This free interactive report on Alarm.com Holdings' earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.
A Different Perspective
Alarm.com Holdings provided a TSR of 12% over the last twelve months. Unfortunately this falls short of the market return. It's probably a good sign that the company has an even better long term track record, having provided shareholders with an annual TSR of 33% over five years. It may well be that this is a business worth popping on the watching, given the continuing positive reception, over time, from the market. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Take risks, for example - Alarm.com Holdings has 2 warning signs (and 1 which is a bit concerning) we think you should know about.
We will like Alarm.com Holdings better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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