The Potential of ShotSpotter
Gunfire detection company ShotSpotter, a micro-cap stock, reported their fourth quarter and full year 2018 earnings on Tuesday. I don’t believe many investors have this stock on their radar, but they are developing unique technology and are growing quickly with little to no competition.
I want to discuss the Total-Addressable-Market (TAM) of ShotSpotter, but first let’s go into the company financials. They have a market cap of $500 million, which at least relative to other public companies is a small number. Their P/S ratio is 15 and they have typically lost money as a public company. The stock is up over 300% since its IPO in the middle of 2017.
One of ShotSpotter’s beacon’s used to triangulate gunshots.
Here are some highlights from the earnings report:
Sales up 46% Y/Y to $34.8 million for the full fiscal year
Gross margin improved to 55% in 2018
Total square miles of coverage of 643, up 35% Y/Y
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So What Does ShotSpotter Do?
Now that you understand some of the company’s financials, let’s go into what they do and how they make money. Gunfire detection is their bread and butter, and really the only significant revenue generator on the balance sheet. The technology uses sound waves and other sensors to locate gunfire so police officers can respond quicker to gun violence situations.
Police departments pay a monthly subscription service for the detection products, so ShotSpotter grows revenue by adding more cities and square miles to their coverage.
Recent Acquisition
In October the company announced it was buying HunchLab, a “predictive policing” research firm. Here is a quote describing HunchLab from the press release:
“HunchLab applies risk modeling and artificial intelligence to help forecast when and where crimes are likely to emerge and recommends specific patrol missions and tactics that can deter these events.”
To me, this sounds like researching ways to create a scary China-like dystopian police state. In reality, it is probably just another way for police departments to better utilize their resources and another way for ShotSpotter to make money.
I think Axon, another public company that provides hardware and software for police departments (and a member of our MMP), should buy ShotSpotter. It would give ShotSpotter more funding to grow their services and would give Axon another product in their growing arsenal.
ShotSpotter’s Potential
With only 643 square miles under coverage at the moment, it looks like ShotSpotter is nowhere near their TAM, especially if they start expanding internationally. For reference on how big 643 square miles is, there are a ton of individual cities with over 300 square miles of coverage. Conservatively, I’d estimate there are at least 10,000 square miles worthy of coverage by ShotSpotter in the United States
If we extrapolate their revenue per square mile (about $50,000 at the moment), it looks like they have the potential to be bringing in over $500 million from customers annually just from their flagship service. At the right price, I’d seriously consider buying shares of this company. It could (emphasis on could) be a 10-bagger in the making.
Disclosure: The author is not a financial adviser, and may have an interest in the companies talked about.