Short - Arlo Technologies. (NYSE: $ARLO)
Security camera producer with slowing retail growth and extreme customer concentration.
Short: Arlo Technologies (NYSE: ARLO)
Event Summary / One-Page Trade Overview
On Feb. 29th at 5:00pm EST, Arlo Technologies (NYSE: ARLO) reports 4Q 2023 earnings and will provide updated long-term financial and key metric guidance as part of a virtual investor day.
The stock is up 156% over the last year due to impressive SaaS metric growth presented by management. These metrics seem to mislead investors on the actual underlying economics of the business, which are hard to understand without extensive diligence as management is not transparent regarding relevant KPIs.
Given this work on the underlying unit economics of the business, we believe that ARLO will significantly revise long-term revenue guidance downwards on Feb. 29th. as it appears highly unlikely they will be able to hit their previous LT guidance. It also appears that current sell-side revenue projections for FY’24 are far too optimistic and that sell-side analysts will have to revise their projections downwards as well following this guidance update.
We recommend initiating a short position ahead of this guidance update as any downward revisions would disrupt the market consensus growth story and serve as a catalyst. The risk/reward on this short looks favorable given the optimistic sell-side projections / management guidance, the trading history, and what seems to be priced in.
On average, ARLO trades ~$8M worth of volume a day. Borrow cost is low at 0.4% annualized.
Retail subscriber growth has stagnated in the last few quarters, with the majority of subscriber growth being driven by Arlo’s partnership channel (Verisure) in which they earn a significantly worse ARPU. The strategic use of a large price increase masks the fact that to grow revenue enough in FY’24 to meet sell-side and management projections, by our math Arlo would have to add ~0.6M-0.7M retail subscribers in FY’24 which appears highly unlikely.
Arlo’s European customer Verisure, which accounted for 40.1% of revenue in FY’22 and 30.9% in FY’21 has a mandatory $500M purchase agreement that expires January 1st, 2025. We think management may be under-stating the risk that this contract does not renew, and $439M of the $500M has already been purchased through 3Q‘23 by Verisure. Verisure is owned by private equity fund Hellman and Friedman, and given their ownership of competitor SimpliSafe as well as their leverage over Arlo due to the high customer concentration, it is also possible that a renewal happens on worse terms.