Company Profile: ShotSpotter, Inc.
I am excited to profile ShotSpotter, Inc. (ShotSpotter) a small cap company, for this week’s company profile. ShotSpotter is a gunfire detection technology company that had its Initial Public Offering (IPO) on June 12, 2017 at a price of $11.00 per share. An IPO is when a previously private company (i.e. does not trade on a stock exchange and have shares the public can buy (with some exceptions)) goes “public”. In order to go “public” and list on a stock exchange. so people like you and I can purchase shares, the company does an IPO. The fact ShotSpotter just has its IPO means that it is a very new stock and people will be watching with interest as to how it performs now that it is publicly listed.
ShotSpotter employs gunfire detection technology, specifically sensors, that notifies police departments when there is gunfire detected by the sensor. The technology can alert police within 45 seconds of the gun being fired and officers can triangulate where the gunfire is originating. This allows officers to be on the scene dealing with the situation sooner and more effectively. Also, this technology can act as a deterrent if individuals know the police are likely to be on the scene rather quickly.
While I do not reside in the US, Canadians follow the issue of gun control and the lack thereof in the US with much interest and fascination. We do not have a great understanding of the culture of guns in the US and the right to own firearms under the Constitution so I cannot comment on any of those topics. However, it does seem the issue is not going to be resolved in favour of more gun control any time soon and ShotSpotter technology is likely going to be of continued use for a long time to come on both sides of the border and internationally.
· As stated many times on this site, I, nor ZSM Creative Inc. operating as The Capital Pink, are financial advisors and have no financial accreditations. I am applying some basic evaluation tools to this stock along with some commentary but this should only serve as a starter for your further research. The information below is only current to the day this post was written which may or may not be the same day as this post was published so please update the ratios and numbers to the current day before relying on them as they may have significantly changed (see How Do I Evaluate a Stock? (Part One) for information on where to find the ratios and numbers online). Please read my Legal Disclaimer. Also, I do not own ShotSpotter stock and am not affiliated with them in any manner.
What is ShotSpotter, Inc.?
ShotSpotter is a global leader in gunfire detection and location technology. Founded in 1996, it is based in Newark, California. Importantly, it possesses multiple patents on its acoustic location technology which is important for investors to consider as new entrants to the space is always an issue of which to be aware. It currently has installations in the US, Puerto Rico, US Virgin Islands and South Africa. Over 400 square miles in the US are monitored at present. Some of the cities using ShotSpotter technology include: Boston, Miami, Milwaukee, San Diego, San Antonio, Cincinatti, Louisville, Chicago and internationally, Cape Town.
How does it work? Acoustic sensors, placed in a magnitude of 15-20 sensors per square mile, detect and triangulate the gunshot activity. The sensors capture time, location and an audio of the gunshot. The data is first filtered by a computer algorithm and then further qualified by a person at the ShotSpotter Incident Review Centre to ensure the sound is in fact gunfire. Further, other important intelligence may be conveyed such as whether a full automatic weapon was fired. This process takes under 45 seconds from gunfire to 911 alert. Police are able to attend at the scene more quickly, perhaps before the shooter as left the scene, and also more accurately determine where the shooter is located and make strategic decisions accordingly.
Other important points to note about ShotSpotter:
· Recently signed a memorandum of understanding (like a contract but not as formal or binding) with GE (General Electric) to bring gunfire detection technology to city light fixtures. This is a huge step for the company as now they have a major company lending their support and future partnership AND the idea of adding these sensors to existing city light fixtures is huge. Having a ShotSpotter sensor embedded into city roadway light fixtures makes sense from a cost and coverage perspective. This partnership appears very promising for the company’s growth.
· ShotSpotter makes its money by charging an annual subscription for the use of its technology.
· 80,000 alerts were sent in 2016 and they have 670,000 gunshots in its database! I would suspect this means over 670,000 gunshot acoustics from which the technology uses for comparison to actual incident gunfire.
· 49% year over year revenue growth from the first half of 2016 as compared to the first half of 2017.
· The overall market for this type of technology generally is $1.4 Billion.
· Despite the prevalence of gunfire in many US cities, residents call the police less than 20% of the time. If they do call, the shooter has fled and the information may be inaccurate or incomplete.
· All installation costs of the sensors are recovered within 12 months of deployment.
· High customer and revenue retention.
· ShotSpotter publishes a National Gunfire Index which presents interesting gunfire stats. Here is a screenshot from that Index for 2016:
What is ShotSpotter’s stock doing?
As at December 14, 2017, the numbers from our basic stock evaluation tools are as follows:
Share price: $13.70 USD
One share of ShotSpotter will cost you $13.70 USD. The price over the past 52 weeks has ranged from $9.33 to $20.15. Recall this company just IPO’ed in June at $11.00 and has not been a public company for 52 weeks.
Price to Earnings (P/E): 1,380 (Forward)
Recall this is the stock price divided by the earnings per share. If the P/E is high, you should expect to get some growth for having paid a bit more for the stock however, it could indicate the stock is overvalued. The industry average here according to Morningstar is 126. To put this figure into perspective, the market is giving ShotSpotter’s stock a value equal to 1,380 years of its earnings! This is so high! Investors are clearly thinking this stock has a ton of growth in it which is likely does at it just was listed on the stock exchange in June. This is definitely not a value stock. One is definitely taking a risk the ShotSpotter has lots of room to grow by buying its stock.
Dividend Yield: --
Dividend paying stocks are something many investors look to buy as they are like an interest rate on your shares. Dividend payouts are discretionary. Dividend yield represents the amount the company pays out in dividends relative to its share price. While a higher dividend yield is usually more desirable, you still need to consider the health of the underlying company before making a generalization either way. Here, ShotSpotter is not paying a dividend as of yet. This is not surprising given it is new to the market.
Earnings per Share (EPS): -$0.81
This figure will tell you a great deal about the growth of the company. It takes what the company earns and divides it by the number of shares outstanding. It is essentially the profit allocated to each share of the company. The bigger the number the better because the more the company earns, the more attractive it is to investors. EPS that is increasing every quarter shows earnings momentum and shows growth potential.
ShotSpotter is in a negative position right now which means its earnings are in a negative position. Again, investors who buy ShotSpotter are buying it for its growth as opposed to its value now.
Revenue: $22 Million (TTM)
Increasing revenue is a good sign that the company is growing. ShotSpotter’s revenue in 2015 was $12million and in 2016 was $16million so it is increasing. Recall above it had 49% increase of year over year revenue for first half of 2016 as compared to first half of 2017.
Return on Equity (ROE): -55.89%
ROE tells you what sort of return the company is getting on the shareholders money. An increasing ROE is a good sign. ShotSpotter is in a negative ROE position.
Market Capitalization: $131.7 Million
This indicates ShotSpotter is a small cap stock. Recall that small cap stocks usually have the most room for growth as opposed to large, established, stable large cap companies.
Net Profit Margin: -35.87%
This ratio tells us what profit is left over after the company pays its expenses for the year. The more money it keeps, the better. High net profit margins mean that a company is good at keeping profit after expenses are paid, which may mean they are adept at keeping their expenses down. It is a good idea to compare these over an industry to see what companies are good at operating and maintaining a high net profit margin. ShotSpotter has a negative net profit margin.
Cash Flow per Share: --
Recall that this number is the cash flow through the business divided by the number of shares outstanding. It represents the net cash a company can produce per share and many investors consider this a better indicator of a company’s health than the more popular, earnings per share ratio because it is more difficult to manipulate cash flow numbers than it is earnings numbers. A higher value usually indicates the company is in a healthier position.
This ratio should be considered along with the EPS figure for a better picture of the company’s health as there should not be a wide discrepancy between the two figures. If there are large variances between those numbers, you may want to consider if there were large, non-recurring one-time items that account for the large variance. It is also wise to look at a company’s cash flow picture in the long term as that should take into account one time, large capital expenditures (money spent by a company to buy or maintain an asset like land, buildings or equipment, ie. “fixed assets”) that required large amounts of cash. ShotSpotter is once again in a negative position on this metric due to its negative cash flow.
Price to Sales (P/S): 6.3
This ratio compares the total market value of the company with its sales revenues. There is not a great deal of manipulation a company can do with its sales data so this can be a good indicator of how well the company is doing. Recall that a lower ratio relative to its peers in the industry can indicate a potentially good investment opportunity. Morningstar indicates the industry average is 5.9 so ShotSpotter is close to average. By this metric, the company is performing decently.
Price to Book (P/B): 9.8
This compares the stock price with how much the stock would be worth if the company was liquidated or sold off. It is the value of the stock in comparison to the underlying assets of the company. Thus, a low P/B relative to the stock price suggests you are not paying too much for what would be leftover if the company went bankrupt for example. The industry average is 7.2 so ShotSpotter is not too far off this average.
Price to Cash Flow (P/CF): 65.9
Having cash left over after expenses are paid off is crucial to remaining in business so this is a good indicator about the health of a company. Generally lower is better as it could indicate the company is obtaining large cash flows not yet reflected in the stock price. Morningstar indicates the industry average for this industry is 17.7. ShotSpotter is significantly higher than this average.
This completes a basic evaluation of ShotSpotter. As always, there are tons of articles and discussions online about this stock and all stocks so they are also a good place to look at for further consideration. Clearly, ShotSpotter is a growth stock. It is new to the market and the numbers are not favourable but that does not mean it won’t grow and become a good stock to hold. It is definitely in a growth stage so you cannot compare it to last week’s McCormick’s which is a large cap, well established company. The the demand for the product should be solid, whether a competitor arrives to do this service better remains to be seen and one may want to do further research into that aspect before arriving at an opinion on this stock.
**Top photo courtesy of Max Ostrozhinskiy for Unsplash