Friday, December 20, 2019

A Current AIM Small Cap Equity Holding: ShotSpotter, Inc. (SSTI $23.57): “Spotty Stock”

 ShotSpotter, Inc. (SSTI $23.57): “Spotty Stock”
By: Jimmy O’Brien, AIM Student at Marquette University

 Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


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.

 Source: FactSet

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