Arlo stock soars in post-IPO debut as investors bet subscription revenue will come soon enough

Arlo Technologies Inc. offered the latest evidence that investors are willing to take a chance on hardware IPOs, despite some notable flops in the category over the past few years.

Shares of Arlo Technologies Inc.ARLO, +38.13%were up 33% in their first day of trading Friday, a day after speaker maker Sonos Inc.’s stockSONO, +5.22%popped in its public debut. Both companies priced their shares below their price-estimate ranges, but both stocks are now trading above the upper reaches of those ranges.

Five things: 5 things to know about the Netgear security-camera spinoff Arlo

Arlo and Sonos, as it stands, are heavily dependent on device sales, but they’ve told different stories to Wall Street in the process of going public. Arlo, which sells home-security cameras, hopes new feature launches will enable it to generate more recurring revenue from services, while Sonos is betting that its reputation for quality will drive existing consumers to outfit additional rooms with Sonos speakers and help the company gain traction in overseas markets.

Arlo’s chief executive, Matt McRae, told MarketWatch that the company is already seeing “a healthy conversion from free trial to paid subscription” for Arlo Smart, a recently launched subscription plan. Arlo Smart’s paid tiers make use of computer-vision technology to alert users of suspicious activity around their homes and give subscribers the option to notify the police if they’re concerned by what they see on Arlo’s video footage.

“Pairing services with the product using computer vision and [artificial intelligence] is really where the company is going,” McRae said. “We’ve got the service component and cloud architecture, which are big differentiators from a pure hardware play.”

Services revenue accounted for just 8% of Arlo’s overall revenue in the first quarter, but McRae saisd he expects new offerings to “accelerate the attach rate on subscriptions.”

See also: Pinduoduo stock soars in debut as IPO fever rolls on

Do-it-yourself home security is a growing but still-niche category, and companies in the industry see opportunities to expand their businesses beyond selling to homeowners. McRae said his company hopes to broaden its customer base to include more small businesses, insurance companies and home builders. Arlo currently has 2.2 million registered users.

In selling security cameras, Arlo, a Netgear Inc.NTGR, +1.86%spinoff, goes up against tech giants as well as a host of upstarts. Alphabet Inc.’sGOOGL, -0.24%GOOG, -0.20%Google is in the business through its Nest unit, and Inc.AMZN, -0.60%recently acquired Ring.

According to Canary, a New York–based startup that also makes home-security devices, it’s had more success in driving services revenue. Chief Executive Adam Sager told MarketWatch that 50% of his company’s customers are subscribers to some sort of paid service.

Sager had mixed feelings about Arlo’s IPO. “We think it’s positive for us, but we just hope our space isn’t looked at as a hardware space like GoProGPRO, +17.70%but rather one that can bring real value to people’s lives through AI and other added services,” he said.

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