This ad makes me sad in many ways, but readers have been asking… so let’s get you some answers.
Here’s part of the intro email from Ian Wyatt, who’s pitching a “urgent trade alert” that will be part of another of his webinars (or if you want to be old-fashioned, “infommercials”) to be hosted on Friday. We don’t know yet which newsletter he’ll be promoting, or whether he’ll give the name away for free to those webinar listeners or will just further tease it to get subscribers.
“NEW tech stock IPO secures America’s schools!
“Click here to become an ‘early investor’ today.
“In elementary school, I never prepared for ‘active shooters.’
“My teacher never put a barrier in front of the classroom door – and instructed me to hide under the desk.”
That’s probably true for most of us, and as a parent of school-aged children it’s genuinely horrific… not so much because I’m sure my kids are at risk, they’re still far more likely to be killed in my car on the way to school than they are to be shot at school, but because we can’t help but imagine what it feels like to be part of one of those communities, and empathize with those families. And, of course, it’s incredibly frustrating that the problem is getting worse each year, not better.
So what’s this have to do with making money? More from Wyatt…
“You see, I’ve uncovered a new “Smart Crime” technology that protects our kids… and secures our schools….
“I’m getting ready to “load up” on this stock. Frankly, I’m expecting 291% profits from this huge growth stock.”Are you getting our free Daily Update
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So that’s intriguing… what other clues do we get before this webinar takes place?
“Why Atlanta, Baltimore and Chicago are 100% IN on this new tech.
“The fastest and easiest way to find ‘active shooters.’
“Why this is called ‘the Police Officer’s New Best Friend'”
So who is it? Well, the clues are limited… but the Thinkolator sez Wyatt must be talking up ShotSpotter (SSTI).
ShotSpotter has been public for almost exactly a year, it’s a still-small (market cap about $350 million) tech/service company that installs audio surveillance devices in cities (and now on some campuses) which serve as a “first detection” network for gunshots, and they sell cities an annual subscription to this service that will triangulate the precise sounds of gunfire and alert police about a specific “shots fired” location, often several minutes before a 911 call comes (if, indeed, anyone calls at all).
The business model sounds pretty compelling, and as they present it in their investor presentations it’s quite scalable, with relatively low installation costs that should, if they’re right about the fact that their marketing can get more efficient, let them improve margins consistently as they grow sales. It’s not entirely a technology solution, though, so it’s not as perfectly scalable as a software network — the systems are apparently still monitored by human beings who help to direct police officers to incident sites.
I don’t know that this will ever be a meaningful product for schools, though the company is certainly aware of the opportunity in the school market following horrific school shootings over the past decade or two, and has installed ShotSpotter systems in schools in the past (including a test in an Oakland school back in 2013, for example), but so far it hasn’t seemed to particularly catch on in the K-12 market. I don’t know whether that’s because the product is a bad fit for the need, or because the cost would seem very high for a lot of schools, or something else. It doesn’t seem that the indoor “Site Secure” product they used in that Oakland school is still a big part of the company, but they do specifically talk about indoor location specificity with their SecureCampus product that’s targeted more at Universities.
Financially, there’s some appeal here — it’s not a cheap stock, to be sure, and you shouldn’t expect a cheap stock when revenue is growing at 50%, but they are anticipating that they will be profitable by the end of this year, and if they can convince their core customers to continue with the system (or more importantly, expand it into new precincts and areas of the city), the scalability kicks in pretty nicely. They’re still so small right now that there’s opportunity even just in their core cities that can provide some basic growth — places with relatively high crime and a fairly large number of shootings, like New York City and Chicago and Baltimore — though to get much bigger they’ll have to get more cities on board… and they’ll have to make sure that their fairly high-ticket service continues to show some “return on investment” to keep earning a part of those tight city budgets.
Charlotte, for example, reportedly canceled the service a couple years ago — not because it didn’t work, but because it wasn’t worth the money… and with a lot of pressures on big city police departments to incorporate lots of new technologies, including other surveillance systems and body cameras, not all cities will opt to buy everything.
Right now, Chicago is by far their biggest customer, covering more than 100 square miles with ShotSpotter sensors by next year… with claims of excellent success in the most dangerous neighborhoods, but also some controversy. It’s also the best example of the company’s “land and expand” strategy to get new customers with relatively small installations in the highest-risk areas, and then convince cities to continue increasing their coverage area.
I haven’t looked into it enough to make any qualitative assessments about whether I think the product is worthwhile or will make a huge difference in public safety, but on the financials it sounds pretty good — very high revenue growth, emerging earnings, and, assuming the product renewal rate remains high, pretty good predictability from those recurring future earnings… everyone wants to have a cloud-based “subscription business” right now, so this certainly fits that trend.
There are a few analysts covering the stock, with guesses that they’ll earn something in the 18-25 cent range next year and close to a dollar in 2020, with rapidly improving margins — so you can certainly make a case for the stock, even at the relatively high price of $32 and a PE of about 35 on 2020 earnings forecasts. It won’t be low-risk, and a lot will depend on how many customers they can acquire, and whether the cost to acquire those customers will keep rising (as it did last year), but it is, at least, mathematically possible for them to grow into their valuation… and for a lot of tiny cloud startups, you can’t really make that claim with a straight face.
I’m not rushing out to buy ShotSpotter, and I don’t expect it to make any difference in K-12 schools, but it’s a decent small company and it trades at a price that can be justified given their growth rate. I’d want to learn more about other cities that have decided to buy or cancel the service over the past few years and form a stronger opinion about the efficacy and the appeal outside of the most shooting-prone neighborhoods in a few big cities, but that’s just my first impression after reading about the company this morning — when it comes to your money it is, of course, your call. So what do you think? Wanna jump on ShotSpotter before Wyatt talks it up on Friday, or before it hits the LD Micro conference this afternoon? Think it’s already too expensive? See some skeletons in the closet that we should be aware of? Let us know with a comment below.