Is Arlo Technologies Significantly Undervalued Amid Product Innovation and Subscription Growth?

Arlo Technologies (ARLO) has emerged as a compelling case study in valuation dislocation. Despite posting 30% year-over-year growth in subscriptions and services revenue ($78 million in Q2 2025) and raising its full-year service revenue guidance to $310 million, the stock trades at a P/E ratio of -75.95 as of August 2025 [1]. This stark disconnect between operational momentum and market pricing raises a critical question: Is Arlo significantly undervalued, or is the market correctly pricing in persistent profitability challenges?

The Case for Intrinsic Value

Arlo’s subscription model is a key driver of intrinsic value. Its Annual Recurring Revenue (ARR) surged to $316 million in Q2 2025, a 34% increase year-over-year, with non-GAAP service gross margins hitting a record 85% [2]. This margin expansion, coupled with a 218,000-subscription addition (totaling 5.1 million), suggests a scalable, high-margin business. The company’s strategic pivot to a services-first model—evidenced by subscriptions now accounting for 60% of total revenue—positions it to capitalize on the $100 billion smart home security market [3].

Product innovation further strengthens Arlo’s value proposition. The launch of over 100 new SKUs across essential, pro, and ultra segments, combined with AI-driven services like Arlo Secure Six, has enabled cost reductions of 20–30% in bill-of-materials expenses [4]. These initiatives, paired with a 14% adjusted EBITDA margin in Q2 2025, indicate improving operational efficiency [5].

Valuation Dislocation and Industry Benchmarks

The U.S. electronics sector trades at a P/E ratio of 49.0x as of August 2025, far exceeding Arlo’s negative P/E [6]. Meanwhile, Arlo’s P/S ratio of 3.5x is 52% higher than the industry average of 2.3x [7]. This premium reflects investor optimism about Arlo’s subscription scalability and strategic partnerships, such as its collaboration with ADT to integrate AI-driven security into 10 million+ installed systems. Analysts project this partnership could drive material revenue growth starting in 2026 [8].

However, the market’s skepticism is not unfounded. Arlo’s TTM EBITDA margin remains negative at -6.85%, and its $31 million net loss in 2024 underscores ongoing profitability hurdles [9]. The company’s reliance on international markets—where revenue fell to $50 million in Q2 2025—adds volatility, compounded by tariffs expected to reduce gross margins by 300–400 basis points quarterly [10].

Notably, historical backtesting from 2022 to 2025 reveals that ARLO’s share price has tended to underperform the market immediately after earnings releases, showing a negative average return over the first 5 trading days. From day 10 onward, the pattern becomes less clear, with returns converging toward the benchmark.

A Balancing Act: Growth vs. Profitability

Arlo’s intrinsic value hinges on its ability to convert subscription growth into sustained profitability. While its free cash flow of $34 million in H1 2025 and $160 million in liquidity provide flexibility, the path to positive EBITDA remains uncertain [11]. The electronics sector’s projected 7.5% CAGR from 2024–2031 [12] suggests Arlo must outperform industry peers to justify its valuation premium.

Conclusion

Arlo Technologies sits at a valuation inflection point. Its subscription scalability, AI-driven services, and strategic alliances point to a fair value higher than its current $1.817 billion market cap. Yet, the market’s punitive pricing reflects valid concerns about margin pressures and international headwinds. For investors, the key question is whether Arlo can sustain its 30% subscription growth while navigating operational challenges—a scenario that could unlock significant upside if executed successfully.

Source:
[1] Arlo Technologies Inc (ARLO) Q2 2025 Earnings Call Highlights [https://finance.yahoo.com/news/arlo-technologies-inc-arlo-q2-074159201.html]
[2] Arlo Technologies (ARLO): Is This Home Security Innovator [https://www.ainvest.com/news/arlo-technologies-arlo-home-security-innovator-ready-unlock-sustained-growth-2508/]
[3] Arlo Technologies (ARLO) - P/S ratio [https://companiesmarketcap.com/arlo-technologies/ps-ratio/]
[4] Arlo Technologies Q2 Revenue Exceeds Estimates ... [https://www.ainvest.com/news/arlo-technologies-q2-revenue-exceeds-estimates-subscription-growth-drives-success-2508/]
[5] Arlo Technologies (ARLO) Financials 2025 [https://www.marketbeat.com/stocks/NYSE/ARLO/financials/]
[6] U.S. Tech Sector Analysis [https://simplywall.st/markets/us/tech]
[7] Arlo Technologies P/S Ratio 2017-2025 [https://www.macrotrends.net/stocks/charts/ARLO/arlo-technologies/price-sales]
[8] Arlo Technologies Inc (ARLO) - P/E ratio [https://companiesmarketcap.com/arlo-technologies/pe-ratio/]
[9] Arlo Technologies EBITDA Margin 2017-2025 [https://macrotrends.net/stocks/charts/ARLO/Arlo%20Technologies/ebitda-margin]
[10] Arlo Technologies (ARLO) Q2 2025 Earnings Call Transcript [https://www.fool.com/earnings/call-transcripts/2025/08/07/arlo-arlo-q2-2025-earnings-call-transcript/]
[11] Arlo Technologies: A High-Growth SaaS Play with [https://www.ainvest.com/news/arlo-technologies-high-growth-saas-play-strengthening-margins-strategic-alliances-2508/]
[12] What Is the Growth Rate of the Electronics Sector? [https://www.investopedia.com/ask/answers/052515/what-growth-rate-electronics-sector.asp]