ShotSpotter Stock: Recent Sell-Off Presents Buying Opportunity

The recent sell-off in ShotSpotter’s (NASDAQ:NASDAQ:SSTI) stock presents a buying opportunity for long-term investors. The stock does have some high volatility since ShotSpotter is a small $331 million market cap company. For example, the stock has a 52-week high of $40.68 and a 52-week low of $22.63. The dips in price present buying opportunities in my opinion. Recently, the stock dropped by about 30% to an oversold level. However, the stock is beginning to recover from this sell-off.

The Need for ShotSpotter’s Solutions

The high prevalence of gun violence creates the need for the company’s solutions. If we exclude suicides, there were already 14,763 people killed by guns so far this year in the United States.

High crime areas can use ShotSpotter’s gunfire detection systems to respond quickly to gun violence scenes to increase the chance for better outcomes. Most gun violence occurs in cities. That geographic concentration works well for ShotSpotter’s Respond gunfire detection system. Only 20% of incidents are reported via 911 on average. So, ShotSpotter’s real-time detection system can get police to the scene on a timely basis and much more frequently than if witnesses were relied on to call in the incidents.

The company also has solutions for universities, corporate campuses, malls, transportation centers, and other important areas to protect. These solutions are known as ShotSpotter Secure Campus and ShotSpotter SiteSecure.

Another solution from the company is ShotSpotter Connect. Connect is patrol management software designed to help plan directed patrols and tactics to deter various types of crime. The company also offers ShotSpotter Investigate which is a cloud-based solution to streamline investigations and speed-up case work. All of these solutions assist law enforcement to make responding to and solving cases more efficient and effective.

Valuation

ShotSpotter has an attractive valuation in terms of cash flow. The stock is currently trading with a price/cash flow of 9.8. This is below the sector median price/cash flow of 16. Typically, price/cash flow ratios below 10 are attractively undervalued. Therefore, the recent selloff in ShotSpotter’s stock brought the price/cash flow to an attractive valuation level in my opinion.

ShotSpotter produced positive operating cash flow from 2019 to 2022. The positive cash flow can help drive future growth as it enables ShotSpotter to invest in business expansion. This expansion includes increasing business in existing markets and expanding into new markets. That’s why I think it is important to evaluate ShotSpotter’s valuation in terms of cash flow.

Technical Perspective

The stock recently bounced higher from a support zone and oversold level. The RSI shows strength as it is increasing near 50. The green MACD line recently crossed above the red signal line, indicating that the trend changed from negative to positive. Given the new positive momentum, it looks reasonable for the stock to increase to the mid to upper 30s over the next few months.

The weekly chart above provides a longer-term perspective. The price had a significant rise this past week indicated by the large green candle. The long-term also shows support in the $20s. However, the longer-term resistance is in the lower $50s. This suggests that the stock has good long-term upside as ShotSpotter continues to grow. The potential for the stock to reach the $50s could depend on a post-recession stock market recovery. This might take over a year to materialize. So, we will see what happens if the first resistance area in the mid to upper $30s is reached. Of course, we will also have to evaluate the fundamentals going forward which can affect the technicals.

Future Growth Prospects

ShotSpotter typically sells its services to government entities which are always around and don’t go out of business. Selling to governments can be complex with long sales cycles. However, the company’s experience found governments to be loyal customers after trust has been established through consistent performance and execution. ShotSpotter has a 97% customer satisfaction rating for the Respond solution.

The company loyalty creates long-term revenue streams with low turnover rates. ShotSpotter achieved zero attrition in 2022 and expects this to continue through the remainder of the year.

The company achieved positive recent results with a 37% increase in revenue and a 39% increase in adjusted EBITDA in Q2 2022. ShotSpotter went live in 4 new cities and expanded business in 6 areas during the quarter. ShotSpotter has momentum with 12 contracts in new cities and 8 expansions for current customers to go live in the 2nd half of 2022. That is a record amount of contracts for the company to announce in an earnings release since going public.

The international market also remains a long-term growth opportunity. ShotSpotter current has a presence in the United States, South Africa, and the Bahamas. The ShotSpotter Respond solution is contracted in 135 cities. There is plenty of growth potential within and outside of the U.S. for ShotSpotter to expand into. There are 512 cities with a population of at least 1 million people throughout the world. Plus there are more smaller cities, towns, corporate campuses, universities, etc. that can benefit from ShotSpotter’s solutions. The global market can provide many years of growth for the company.

ShotSpotter is expected to grow revenue between 15% and 16% in 2023 (consensus). The company is expected to average 30% annual earnings growth over the next five years. This strong, above-average growth should help drive the stock to outperform the S&P 500 which is expected to achieve about 12% annual earnings growth over the next 3 to 5 years.

Balance Sheet

ShotSpotter has $3.4 million in cash and equivalents and $3.9 million in total debt. The company has 1.4x more current liabilities than current assets. However, this is due to running with a high amount of unearned revenue due to the gap between when the company is paid and when systems are installed.

The longer-term balance sheet structure provides a better picture. ShotSpotter has 1.9x more total assets than total liabilities for total equity of $52.9 million. With positive cash flow, ShotSpotter shouldn’t have any issues with handling its long-term debt.

ShotSpotter’s Long-Term Outlook

ShotSpotter looks like it has a bright future. The company has multiple offerings that can help municipalities achieve improved outcomes for gun violence and crime. The high prevalence of gun violence and crime in certain areas shows the need for ShotSpotter’s solutions. The company’s high 97% customer satisfaction rate demonstrates that ShotSpotter has solutions that are effective. ShotSpotter can build on its momentum by growing in the United States and beyond.

The recent sell-off in the stock appears to be turning around as the price is recovering. While there will probably be a lot of volatility in the stock during this bear market, the long-term multi-year outlook looks positive for above average price appreciation. This is likely to be driven by ShotSpotter’s above-average double-digit revenue and earnings growth.