We came across a bullish thesis on Napco Security Technologies, Inc. (NSSC) on Substack by Value Chaser. In this article, we will summarize the bulls’ thesis on NSSC. Napco Security Technologies, Inc. (NSSC)’s share was trading at $21.64 as of April 15th. NSSC’s trailing and forward P/E were 16.52 and 24.69 respectively according to Yahoo Finance.
A security technician installing a high-tech security system with multiple door locks.
NAPCO Security Technologies (NSSC) has emerged as a compelling investment opportunity amid the broader 2025 market sell-off, which has opened the door for selective, high-conviction plays. Down 62% from its highs less than a year ago, NSSC is being overlooked by the market despite steadily improving fundamentals, driven by a long-term shift in its business model from hardware manufacturing to a high-margin, software-enabled recurring revenue stream. NSSC designs and manufactures advanced electronic security equipment, including intrusion and fire alarm systems, and monetizes these systems through a growing subscription-based model. After third-party vendors install NSSC systems, customers subscribe to the company’s software services to manage and monitor their security infrastructure. This recurring service revenue (RSR) is the company’s crown jewel — boasting 91% gross margins and 14% year-over-year growth — and has become the largest segment in the company’s revenue mix, positioning NSSC for margin expansion and more predictable, resilient earnings.
The core moat of NSSC lies in its high switching costs. Similar to enterprise software providers, once a customer — such as a school district — deploys NSSC’s systems across multiple facilities and trains staff to use the software, switching to another provider would require significant reinstallation, retraining, and potential operational disruptions. This stickiness ensures long-term customer retention and creates a robust foundation for recurring revenues. While hardware sales remain cyclical and are currently under pressure due to macro construction headwinds, the growth of RSR is mitigating volatility and setting the stage for more consistent topline performance.
On the financial front, NSSC has maintained a strong balance sheet with $94 million in net cash, representing approximately 11% of its $838 million market cap. This gives the company considerable flexibility in navigating economic slowdowns or pursuing strategic acquisitions. Meanwhile, despite recent revenue softness, the company continues to generate impressive free cash flow, with margins expanding as a result of the growing contribution from the software side of the business. Valuation-wise, NSSC is trading near historical lows — with a 17x P/E (excluding non-recurring items), 17x P/FCF, and a modest 4.6x price-to-sales multiple. For a company transitioning into a hybrid software model, these multiples suggest deep undervaluation. SaaS businesses often command double-digit PS ratios, and even a modest rerating of NSSC’s software component could drive a significant uplift in share price. On top of that, the company has initiated a dividend, now yielding 2%, and could enhance shareholder returns further through opportunistic buybacks — a more impactful use of its free cash flow, given current depressed valuations and flat share count over the past decade.
In summary, NSSC represents an asymmetric opportunity. With a business model pivot underway toward recurring high-margin revenue, a pristine balance sheet, and a compelling valuation, the downside is limited while the upside could be substantial. Should recurring revenue exceed 50% and continue growing in the low- to mid-teens, earnings could accelerate sharply due to operating leverage, prompting a rerating of the company’s valuation. NSSC’s story is one of transformation, operational discipline, and a growing moat — a rare combination in today’s market, making it a high-conviction candidate for patient, long-term investors.
Napco Security Technologies, Inc. (NSSC) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 28 hedge fund portfolios held NSSC at the end of the fourth quarter which was 27 in the previous quarter. While we acknowledge the risk and potential of NSSC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NSSC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.