Small-cap stocks represent companies in the early stages of their growth journey, giving them plenty of room to expand. This could translate into significant returns for investors over time. However, small-cap stocks are relatively more volatile than their larger counterparts, meaning their prices can experience sharp fluctuations. While this volatility can create opportunities, it also comes with a higher risk of losses.
Given these risks, it’s helpful to consider analyst ratings when investing in small-cap stocks. A “Strong Buy” consensus rating suggests that industry experts see strength in a company’s business model and can boost investor confidence.
Against that background, let’s look at a small-cap stock that has earned a “Strong Buy” rating from Wall Street analysts, is trading under $20, and has significant upside potential.
Small-Cap Stock: Arlo Technologies
With a market capitalization of about $1.11 billion, Arlo Technologies (ARLO) is a compelling small-cap stock to consider now. The company operates in the smart home security market. It is leveraging its cloud-based platform, artificial intelligence (AI) and computer vision analytics, wireless connectivity, and app-controlled devices to grow its market share and win new customers.
Arlo is expanding rapidly. The company’s registered accounts have more than doubled, while paid subscriptions have increased more than tenfold in the last five years. As of the fourth quarter of 2024, Arlo had nearly 11 million registered accounts and over 4.5 million paid subscribers, reflecting its growing market penetration.
One of the key strengths of Arlo’s business model is its focus on subscription-based revenue, which provides a predictable income stream and supports profitability. The strength in its subscription business and growing paid user base have enabled it to consistently grow its annual recurring revenue faster than 20%. Its ARR was $257.3 million in 2024, reflecting a solid 22.5% year-over-year increase.
Arlo’s service revenue reached $64.1 million generated in the fourth quarter and $243 million for the full year, representing a 21% year-over-year increase. Notably, service revenue now accounts for a significant portion of total revenue, comprising 53% in Q4 and 48% in 2024.
The company is also improving its margins, with adjusted service revenue gross margins consistently exceeding 76% throughout the year and reaching 81.7% in Q4. This marks a significant improvement from the 74.4% margin reported in Q4 2023. Overall, Arlo’s adjusted gross profit for Q4 stood at $45.6 million, with a robust margin of 37.5%, driven by the growth of its services segment and ongoing cost optimization efforts.
Arlo’s ability to retain its subscribers is another key factor contributing to its growth. The company maintains a low churn rate of between 1.1% and 1.3%, indicating that customers, on average, stay with Arlo’s services for more than seven years. Moreover, Arlo’s subscription-based operating model delivers exceptional unit economics, supporting its average revenue per user (ARPU). Its ARPU for retail paid accounts increased from $11.30 in 2023 to $12.60 in 2024, up 12% year-over-year. This ARPU expansion is fueled by the increasing value of AI-driven features and premium service plans, with retail paid accounts generating an impressive 92% gross margin. As a result, Arlo’s customer lifetime value (LTV) has soared to $750 per subscriber, reflecting the strong financial impact of its subscription-based strategy.
Analysts Are Bullish on Arlo’s Future
Arlo operates in a rapidly growing home security market, positioning itself for significant expansion in the coming years. The company’s continued investment in AI-powered security solutions, new device launches, and entry into additional camera segments will drive further growth in 2025 and beyond.
Wall Street analysts are optimistic about Arlo’s future, with a consensus rating of “Strong Buy.” The average price target of $19 per share suggests potential upside of 76% from current levels, making it an attractive opportunity for investors seeking growth stocks.
Arlo Technologies is well-positioned for sustained growth with its strong financial performance, rapidly growing subscriber base, expanding profit margins, and low customer churn.
