James Altucher gives me a headache, but I guess that’s part of his brand as he uses his ‘wild and crazy entrepreneur who eschews convention but hobnobs with insiders’ image to sell his newsletters and books — for a while I felt like I was seeing his bobbing, wild-haired head in my dreams, trying to get me to pony up $1,000 for some retread blather about cryptocurrencies.
But, of course, we don’t judge stock ideas by the people who promote them — we just try to dig through the hype and get you some answers, so you can think for yourself without the pressure of an aggressive sales pitch for, in this case, a $2,000 no-refunds microcap newsletter that he calls Altucher’s Top 1% Advisory.
So what’s he teasing with this “Electronic Police” ad? Here’s a little taste:
“This Futuristic Crime-Fighting Technology Is About To Land In Your Neighborhood
“Sparking a Potential $27 Billion Wave of Wealth as Early as November 13…
“No more murders…
“No more mass shootings.
“No more drive-bys or carjackings.
“No more home invasions or child abductions…
“Ever…Are you getting our free Daily Update
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“Like a scene from the 2002 movie Minority Report, this tiny crime detector I’m calling ‘electronic police’ can stop crimes before they happen.”
So, for those who don’t think we’re close enough to a dystopian “give up all your privacy for a false sense of security” nightmare society yet, apparently there’s more!
Altucher says that 90 cities have deployed what he calls these “AI police units,” and he says the opportunity here makes the huge gains from Axon (AAXN) look like peanuts — if you don’t know Axon, you might remember their old name, Taser… they company supplemented their electronic stun gum business by selling police body cameras, and saw that business and their video evidence “cloud” archiving become so big that they changed their name (he cites a 25,971% gain on Axon, and most folks probably wouldn’t have sat through the 90% drop the stock had from 2005 to 2011 or so… but the more recent performance is certainly phenomenal, with a 150% gain in just the past year).
And apparently there’s some immediate political connection, though it sounds very tenuous:
“Trump is about to pour buckets of money into a plan that could include the infrastructure to make ‘Electronic Police’ a reality.
“Trump has a $1.5 billion plan to make America safe again”
That seems to just be a play on fears, from what I can tell — and on uninformed and manipulated public perception… violent crime and property crime have both been on a long-term decline for most of my life, peaking during the crack cocaine epidemic in the early 1990s and dropping for 25 years, but the public perception of that trend is almost always wrong (the per-capita crime rate has fallen ~75% in 25 years, but for almost all of that time a solid majority of Americans, typically 60-70%, have said that they think there is more crime in the US than there was in the previous year).
But anyway, let’s not let facts get in the way of a good story — “law and order” and “fear of crime” have both been driving factors in American society for at least 50 years, and probably far longer, and that has led to a lot of spending on security… some of which has made some folks very wealthy.
More from Altucher:
“With the sweep of his pen, Trump has set in motion one of the greatest revolutions of the next 100 years…
“A massive plan to improve our nation’s infrastructure.
“And what I expect to happen will change how we fight crime forever, save millions of lives and rain buckets of money on early investors.
“It will spark a brand-new era of crime fighting…
“And send the price of the one tiny company behind it into the stratosphere.”
So apparently this connection between the company has something to do with that “infrastructure” spending that has been promised by both parties for several years but not actually materialized… at least not in any dramatic way that I’m aware of. Trump’s “blueprint” for the current year’s budget, which is different from what was actually passed by Congress, did envision a couple hundred billion for infrastructure over the next decade, though that’s mostly going to be “fix our old roads and bridges”, and the security stuff was mostly focused on the opioid crisis and border security, from what I can tell. $1.5 billion ain’t much on the federal level, though, so there could easily be something of that size on the crime-fighting front that I’m unaware of.
Though really, police spending is generally not federal — so if this is a city-by-city thing, as implied by the hints about Baltimore and Chicago and New York at the top of the ad, the President will have little impact unless he proposes to start supporting local police forces directly in some way… his initial budget priorities went the other way, either trying to cut off local aid for “sanctuary” cities or simply to stop the limited federal support for police hiring that has been in place for 25 years or so (part of that longstanding ‘get more police on the streets’ priority that was put in place during the crack cocaine epidemic).
So what else do we learn about the stock Altucher is teasing? He gives an example:
“It was a Tuesday morning in Fresno, almost a year ago today.
“A crazed gunman going by the nickname ‘Black Jesus’ opened fire in a Catholic Charities parking lot — and was reportedly screaming “Allahu Akbar” while shooting at random.
“While this story could have ended exactly like the tragic Parkland school shooting…
“Things turned out very differently.
“Because battle-hardened Fresno officials had another plan up their sleeves.
“A virtually unknown technology that could dispatch police to a shooter’s location almost instantly.
“‘Black Jesus’ never had a chance.
“Because Fresno police were armed with the ‘Shots Fired’ system, capable of pinpointing the exact location of an active shooter in as little as 45 seconds…”
Ah… so now we have an awfully good idea of what investment he’s pitching, but let’s sip on a few more clues just to be sure:
“… it’s the first technology of its kind to hone in within 11 feet of shots being fired.
“And this, my friends, is the future of police work.
“A breakthrough technology that will change crime forever, save millions of lives and rain buckets of money on early investors.”
“I believe ‘Electronic Police’ could be the plan to end gun violence — and why these detectors would be the perfect system to implement as part of Trump’s $1.5 trillion infrastructure plan.”
Oh, wait, now we’re at trillions? OK, so when he said $1.5 billion before I guess that was a typo… $1.5 trillion is the total proposed infrastructure plan from the administration over the next ten years, though only $200 billion of it would be federally funded. Everyone loves infrastructure spending, but I have a very hard time believing that security technology is going to come out of this bucket — not when thousands of bridges are being red-flagged by civil engineers all around the country.
But anyway, more of Altucher’s pitch about the stock:
“This Tiny $410 Million Company at the Center of This Crime-Fighting Revolution Stands to Grow to…$27,870,730,290
“Because they control 33 patents that make this technology possible.
“And as everyone knows, the company with the patents is the one that gets all the money.
“But everything is happening very quickly.
“On November 13, I expect a special announcement to send share prices to the stratosphere.
“An announcement that with Trump’s new deal could pour a huge amount of money into this company overnight.”
What’s the story with that November 13 date? Here’s what he says:
“This tiny tech company plans to add artificial intelligence capabilities to their current crime detectors.
“And this mission could affect every U.S. citizen – and shoot this tiny tech company into the stratosphere. More details of their acquisition are expected to be announced on November 13.”
And one more clue that he throws in to reinforce the “federal government funding” hopes…
“… cities across America are begging the U.S. government to send funding for it.
“In a recent press release, New York Sen. Schumer urged the Department of Justice to ‘award funding ASAP,’ with the report stating, ‘We need more audio sensors that alert police in real time when gunshots are fired.’
“Just after the Parkland school shooting, Fresno officials also announced they’re expanding their ‘Electronic Police’ to cover 15 more miles to protect an additional 10 school campuses, including all of Fresno City College’s campus.
“Plus, seven new cities have recently deployed the ‘Electronic Police’ in their communities… Cincinnati, Jacksonville, Louisville, Newburgh, Pittsfield, Syracuse and St. Louis County.”
So yes, this is a teaser pitch about ShotSpotter (SSTI), the security technology provider whose primary product is that gunfire detection system that uses audio sensors to triangulate and locate a gunshot location and alert local police. Their latest investor presentation says that they have 550 square miles “under contract” as of March.
The poster child for ShotSpotter has long been Chicago, which has the largest area under contract at more than 100 square miles, for most cities this seems to still be a fairly small-area test in particularly crime-ridden neighborhoods. The $27 billion windfall that Altucher teases is nowhere near rational, that’s many times more optimistic even than the company is hoping for, but they do think they have a core addressable market potential of $560 million in annual revenue (that would be 1,400 cities paying an average of $400,000 per year). Current revenue is $29 million, so they think they’re only at 5% or so of their potential.
What will be the determining factor for cities to decide whether or not to buy this system? I have no idea, but presumably police prioritization will be important, and public sentiment about the danger of shootings would drive interest.
It’s a fairly high-ticket system to put in place and operate, the installation that Senator Schumer was talking about was for Utica, an old rust belt city in central New York with a population of only about 60,000 but, apparently, a substantial crime problem — they have an average of 70 or so firearm-related crimes a year and spend more than $15 million on the police department every year, so the installation cost of $430,000 and annual maintenance of $170,000 might seem manageable, particularly if they get a federal grant for the installation cost… but would it be better to have that system, or to have another cop or two on the beat? Is this a priority when budgets are declining? I don’t know what the outcome of those kinds of decisions will be in each locality, but it will probably depend on verifiable instances of ShotSpotter actually improving public safety.
The company is not profitable, but they are growing their revenue at roughly a 50% pace year over year… and they did indeed acquire an artificial intelligence company just last month called HunchLab, with technology for precision and predictive policing that helps to “inform patrol missions” about when to patrol a particular part of the city, what tactics might be useful, and what crimes are likely. They’re going to call this ShotSpotter Missions now, and will presumably tie in their gunshot data as well. I have no idea what the cost of that program might be, or how it might impact revenue — they say it won’t be material to this year’s financial results.
But James Altucher did at least say one thing that is true and upcoming: They will talk about this AI acquisition on their next earnings call, which is one week from today — after the close on November 13. If they provide exciting guidance about how many cities are clamoring to buy the system and how profitable it is, well, I suppose the stock will react positively… if they instead have to update investors on cities that are canceling ShotSpotter because of budget cuts, we’ll be watching the shares go the other way.
The current financials are not terribly compelling, but it is very much a services and recurring revenue business, and it’s clearly quite scalable because margins have improved nicely as sales have gone up… so IF they can keep signing new cities and renewing and upselling their existing customers, like they did with Chicago this year, then it could work out well. The few analysts who cover the stock are still pretty optimistic, they predict that SSTI will swing to a profit next year and earn 30 cents, followed by a jump to $1.10 in 2020 — so if those numbers are rational (they’re based on revenue continuing at something like a 40-50% annual growth pace), then this is a stock that in a few months will have a forward PE of just under 40.
That’s steep, even after the 30% drop the shares have seen in the past six weeks or so (they’re not alone in that, pretty much all high-growth tech stocks with those high price/sales numbers fell similarly), but it’s within the realm of “rational” if they can continue to put up that kind of growth over a few years — you just have to use your own assessment of the probabilities to decide how much money to risk, because the stock could easily rise 100% or fall 60% very quickly if investor sentiment about their trajectory changes because of some high profile achievements or failures… or, of course, because of whatever they say during their earnings conference call next week. And who knows, maybe when Axon (AAXN, used to be Taser) reports this evening we’ll learn more about municipal police budgets, which could have some impact on SSTI shares as well.
And… that’s pretty much the same thing I said about the stock back when Ian Wyatt was pitching it back in June, and in the months since the stock went from $32 to $65 and now back down to $39 without any dramatic news. So what will drive it next? Will it be this HunchLabs product that lets them upsell their existing customers, or maybe some new big cities signing up? Worrisome cancellations from other cities as budget problems bite? I have no idea, I haven’t bought shares but it’s an interesting company with an appealing business model and, so far, pretty sticky customers… they just aren’t big enough to be profitable quite yet, so we’ll have to wait and see how their sales force does.
As always, it’s your money so it’s your call – let us know what you think with a comment below.