After its 2015 debut on the Nasdaq at $16.05 per share, Alarm.com (NASDAQ:ALRM) had soared to surge past $71 this past May. The stock has since retracted down to its price of  $44 as of this writing, leaving investors wondering what's next. Is the bull run over?

The Virginia-based company provides high-tech building security systems for homes and businesses. More than just security, it also offers broader smart-home technology, like lighting and thermostat control features.

Here are a few things to consider before deciding if you're in or out on this stock.

Business-to-business emphasis

The company faces stiff competition from the usual suspects. Alphabet offers a similar smart-home suite called Nest, while Amazon offers piecemeal services, such as the Amazon Key locking system and its Ring video security system. Less prominent players, such as SecureNet Technologies and United Technologies Corporation, also provide comparable products.

A man touches a padlock icon on a glass screen

IMAGE SOURCE: GETTY IMAGES.

Part of Alarm.com's competitive strategy is its emphasis on business-to-business relationships. For example, whereas Google allows anyone to purchase Nest products from its website and optionally purchase professional installation services, Alarm.com does not sell directly to the general public. Instead, it only offers its products to companies, referred to as "service providers," who in turn install its software and equipment in homes and businesses.

This arrangement aims to thwart competition as the service providers and their customers who use the equipment sign up for terms of at least one year. Alarm.com reports that service providers agree to sell the company's products at specified prices in one-year increments. End users, e.g., homeowners, then purchase subscriptions to Alarm.com's software, with the service provider offering maintenance and security monitoring services, and the company says these subscriptions usually run from three to five years.

The double-edged sword

But the reliance on others to sell to users can be a weakness. Although the company has over 8,000 service providers, the top 10 in terms of revenue generation have accounted for around 60% of Alarm.com's total revenue for years. In particular, Brinks Home Security (aka Monitronics) contributed between 10% to 15% of Alarm.com's total revenue in 2016 and 2017, while ADT Incorporated comprised 15% to 20% of total revenue in 2017 and 2018. Alarm.com hasn't revealed Brinks Home Security's figures for 2018, but it has confirmed the home security giant remains a substantial service provider.

Accordingly, it was bad news when Brinks Home Security filed for Chapter 11 bankruptcy protection this past July following the creation of a restructuring plan in May. While the security giant emerged from bankruptcy in August with debt financing in hand, this scare illustrates Alarm.com's vulnerability should it lose a key revenue-generating partner. In fact, it was concerning enough that in its recent Q3 earnings report, Alarm.com explicitly called out Brinks' situation as a material concern that investors should consider, in addition to the broader service provider situation.

"We expect to continue to receive payments in the ordinary course of business [from Brinks Home Security]," the earnings report stated. "However, if Brinks Home Security is unable to meet its payment obligations to us, our revenue and profitability may be adversely affected." 

Not great for investors, but there is plenty of optimism to be had...

Growth pursuits abound

While it seems the company has no plans to move away from its dependence on service providers, it is taking steps to diversify the providers it works with.

In October, it forked over $61.3 million in cash to acquire a majority stake in OpenEye, a Washington-based company that provides video surveillance infrastructure at over 14,000 locations worldwide and has relationships with 400 service providers.

In a good sign for investors, this might not be an isolated opportunity. With over $100 million in cash and equivalents remaining after the OpenEye acquisition, and with a history of positive cash flow apart from isolated litigation expenses, the company has expressed a willingness to seek more bold growth initiatives.

"I feel like we've gotten to a healthy level of cash production that allows us to be sort of forward-leaning with our [corporate development] activities," CEO Stephen Trundle said during the Q3 conference call. However, "I don't want to go to the point that we're entirely driving growth with [corporate development] when we have so many great organic initiatives that are also worthy of capital allocation."

In a further sign of the company's ability to take on bigger growth initiatives, its net profit has grown significantly. For the first nine months of 2019, the company posted a net profit of about $40 million, or $0.81 per share, which is a huge increase from the approximate $14 million, or $0.27 per share, in 2018.

Looking forward, the company and its investors would be well-served if the company were to reduce its heavy dependence on a few select service providers. Investors should keep an eye on the specific actions the company pursues, since its solid cash flow and huge jump in profits would be conducive to bold growth strategies.