Very few companies can elicit a strong reaction from me … Arlo Technologies (NYSE:ARLO) is one of them. In what has to be the worst day for stakeholders, ARLO stock took a 49% dump Wednesday, plummeting from $7.58 to $3.86.
But it’s not just the loss that both shocks and hurts. Stay around in the markets long enough and you’ll experience the entire spectrum of human emotions.
Instead, I take issue with one analyst who recommends giving choppy Arlo Technologies stock “some time.” Eventually, the “viable, bullish storyline” will come through …
Unfortunately, that analyst was me …
While I can’t remember all the details of the thousands of articles I’ve written in the past few years, ARLO stock is my absolute worst idea. If I could go back and stop myself from typing on that fateful August day, I would.
But at this rate, all I can do is just take ownership of a terrible and regrettable call. Almost from the get-go, Arlo Technologies stock showed no sign of going anywhere but down. This brings me to lesson number one: just because shares take a steep loss doesn’t mean all the bad news is baked in.
So What Caused the Meltdown in ARLO Stock?
Although tech-centric initial public offerings don’t have the best of reputations, a halving in one day is still absurd. That said, after hearing management’s guidance during their fourth-quarter 2018 earnings report, many argue that the volatility in ARLO stock is justified.
On paper, the company — which specializes in wireless home security systems — produced a beat on earnings per share. Against a consensus EPS target of -35 cents, ARLO came in at -33 cents. However, that was the only piece of good news that we heard.
Later, market observers listened to the rest of the story. Providing his best damage control, CEO Matthew McRae described a substantial decline in sector growth. As a result, channel inventory buildup accelerated. The situation was already bad, with inventory climbing up over consecutive quarters. That stakeholders should expect no imminent respite naturally hurt Arlo Technologies stock.
But the real killer came from reduced sales expectations …
Previously, analysts anticipated first-quarter 2019 revenue to deliver $126.5 million, and $606.5 million for the year. Instead, management revealed a severe guidance downgrade: between $48 million to $52 million in Q1, and $380 million to $420 million for the full year.
The fact that Q4 produced a slight beat in sales expectations did nothing to stop the hemorrhaging in ARLO stock.
Where Did I Go Wrong on Arlo Technologies Stock?
I’m not going to bore you with an extended narrative about learning from one’s failures. Unlike the political elite, I refuse to qualify my shortcomings.
Still, I can’t deny that I learn from failures. While I obviously aim for success, I don’t extract much knowledge from victories. Too often, we conflate our triumphs with something that we did. Sometimes, we could just as easily do well with dumb luck.
But with ARLO stock, I have a solid grasp of what ultimately did me in. Primarily, I focused too much on the broader fundamentals and not enough on the company’s finer details.
For instance, I spoke endearingly about the company’s product and subscription services. If you watch any news program, you’ll quickly recognize that America is a violent country. It’s hard to discount the knowledge that organized criminals can go to great lengths to burglarize homes and businesses.
The easiest way to protect yourself? Through security systems such as Arlo’s.
In prior generations, only the well-to-do could afford a service like ADT (NYSE:ADT). Thanks to advancing tech, this service can reach more families.
However, I conflated the broader demand for security with a specific entity’s business potential. If I weighted key metrics such as cash burn more heavily, I may have saved myself from a HUGE mistake.
Assessing ARLO Moving Forward
Naturally, I don’t want to talk about Arlo Technologies stock for the next few months, if at all. From almost every angle, the company disappointed badly.
But irrespective of the awful bloodshed, I can’t say that I’m completely turned off. For one thing, several tech firms have forwarded unfavorable financials without incurring a steep penalty. A good example is Tesla’s (NASDAQ:TSLA) long-term chart, which demonstrates tremendous profitability despite a nasty cash burn.
Second, ARLO still offers a compelling product. The best part? If the economy falters and crime rises in response, Arlo benefits from increased demand and relatively cheap service.
To make this narrative stick, management must produce substantive results. Unfortunately, they’re currently moving in the wrong direction. That places ARLO stock in the extremely speculative category — you can either make huge profits or suffer another soul-crushing drop.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.