Earnings growth of 3.2% over 3 years hasn't been enough to translate into positive returns for Alarm.com Holdings (NASDAQ:ALRM) shareholders

Many investors define successful investing as beating the market average over the long term. But if you try your hand at stock picking, you risk returning less than the market. Unfortunately, that's been the case for longer term Alarm.com Holdings, Inc. (NASDAQ:ALRM) shareholders, since the share price is down 31% in the last three years, falling well short of the market return of around 26%. Furthermore, it's down 18% in about a quarter. That's not much fun for holders.

With the stock having lost 3.3% in the past week, it's worth taking a look at business performance and seeing if there's any red flags.

See our latest analysis for Alarm.com Holdings

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

During the unfortunate three years of share price decline, Alarm.com Holdings actually saw its earnings per share (EPS) improve by 9.9% per year. This is quite a puzzle, and suggests there might be something temporarily buoying the share price. Alternatively, growth expectations may have been unreasonable in the past.

Since the change in EPS doesn't seem to correlate with the change in share price, it's worth taking a look at other metrics.

We note that, in three years, revenue has actually grown at a 8.3% annual rate, so that doesn't seem to be a reason to sell shares. It's probably worth investigating Alarm.com Holdings further; while we may be missing something on this analysis, there might also be an opportunity.

The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).

We're pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized 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. If you are thinking of buying or selling Alarm.com Holdings stock, you should check out this free report showing analyst profit forecasts.

A Different Perspective

Investors in Alarm.com Holdings had a tough year, with a total loss of 12%, against a market gain of about 34%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. On the bright side, long term shareholders have made money, with a gain of 3% per year over half a decade. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. 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. Case in point: We've spotted 1 warning sign for Alarm.com Holdings you should be aware of.

If you are like me, then you will not want to miss this free list of undervalued small caps that insiders are buying.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American exchanges.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.