By:
Jimmy O’Brien, AIM Student at Marquette University
Summary
• ShotSpotter, Inc. (NASDAQ:SSTI) provides gunshot detection
solutions to help law enforcement identify, locate, and respond to gunshots.
Their systems are offered on a subscription model basis with the life of an
average contract ranging between 1-5 years. Through this subscription they
design, implement, manage, and maintain the systems for their customers. Currently,
SSTI has contracts with 100 cities in the United States. They generate 97.4% of
their revenues in the United States and 2.6% in South Africa. ShotSpotter made
their IPO in 2017 and is headquartered in Newark, CA.
• SSTI has not grown
their revenues at the pace they expected and decreased guidance 5-7% the last
quarter.
• Their target market has
not changed, but SSTI has run into difficulties with the timing of their
contracts and acquiring new customers.
• Management stresses the
importance of a long-term outlook for SSTI and are confident that the value
proposition still remains intact.
• The stock is extremely
volatile and SSTI has not shown much transparency into their financial future.
Key
points:
ShotSpotter has lowered their revenue guidance for
EOY2019 for the second straight quarter from 21-28% growth down to 15-17%. This
is a result of prolonged contract negotiations between Universities and
Government Agencies. However, SSTI has been able to increase their
profitability despite not meeting revenue expectations.
In the Q3 earnings call,
Chief Executive Officer Ralph Clark stressed the importance of looking at the
company with a long-term mentality. Due to the timing of their contracts it is
difficult to value the company based on quarter performances. This is why the
guidance has been lowered continuously and is difficult for them to estimate,
but the market size still remains the same. The main driver for SSTI is their
lack of competition in the market and the value proposition of their systems
still remains intact.
The main problem for
ShotSpotter is acquiring new customers. With the recurring revenue from their
subscription based service they have a good foundation to build on, but are not
expanding as quickly as they expected. They recently announced a new deal three
year deal with Puerto Rico for 4.6 million, which will be activated in 2020.
This is in line with their growth strategy that is still targeting major US
cities of Houston, Dallas, and Charlotte. They believe the contracts they are
currently negotiating are going to come to fruition, but are not confident on
the timing. This is promising, but does not give any real insight into their
future.
What
has the stock done lately?
ShotSpotter’s closing
price of $23.60 is up 14.42% over the last month. This is a result to earnings
beating estimates, despite missing on the top line. The EPS of $.04 came in one
cent above expectations, but showed a positive sign for a company that has not
been profitable on an annual basis yet. Furthermore, the company is showing
positive signs of growth from the contract with Puerto Rico.
Past
Year Performance:
ShotSpotter has been getting rocked in
this highly volatile year. SSTI has a 52 week range of $18.44-$58.61 and are
down 37.33%. This volatility has come from their inability to show real clarity
into the financial future for the company and inability to become profitable on
an annual basis.
My
Takeaway
ShotSpotter was added to
the AIM small cap fund in March of 2018. Since then it has well exceeded the
price target of $27.00, but has also fallen well below it. The extreme
volatility of the stock is expected from a company that has not yet proven to
be profitable. Although the long-term outlook for the company yields some
positive possibilities, there is very little clarity into ShotSpotter’s ability
to acquire new customers in a timely fashion. For this reason, I recommend
ShotSpotter should not be held in the AIM portfolio and is replaced with a more
stable company.
Source:
FactSet
