This Low-Priced Stock Has Evolving Potential
AI-based weapons detection for security screening sounds promising. Here's a way to play the budding potential of this small-cap name.
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Last week, New York City Mayor Eric Adams, who I believe is trying and probably doing his best in a city that many now consider lost to criminal elements in many places, held a press conference. He announced that the city will soon begin the process of evaluating weapons detection systems to ultimately be deployed into the New York City subway system, where the state police and National Guard have recently been deployed in an attempt to slow the passage of concealed weapons into and through the network.
During the press conference, Adams demonstrated the system now produced by Evolv Technologies EVLV to illustrate for the media the effectiveness of gun scanners. This does not mean that the city has decided to purchase a detector or number of detectors, but it would stand to reason that with the mayor of the city demonstrating the use of a detector to local media that the manufacturer of that detector may have a leg up when a purchase order is made.
Effectiveness
PVMI, which is a surveillance industry research group that has studied Evolv's product, indicates that at higher sensitivity settings, Evolv identifies more guns, but also gives false alerts for items such as cell phones. At lower sensitivity settings, Evolv had trouble distinguishing between cell phones and small knives. Still, the system would likely be an improvement over doing nothing at all or having authorities check bags at random.
The system would also be far more expensive than simple metal detectors. Those systems cost less, but cause lines as every piece of metal is flagged and then must be checked, thus slowing things down and causing long lines. That kind of defeats the purpose of using mass transit in congested areas.
Potential
Should Evolv land a contract as a security provider to New York City, that would make the company the foundling leader in the space. An initial order in the tens of millions of dollars (or more) would go a long way toward landing contracts with other cities currently suffering from high rates of violent crime, and that would likely result in building a base of annually recurring revenue generation.
Evolv is set to report its first-quarter financial results on or around May 10. Expectations are low... for an adjusted loss per share of $0.06 on revenue of slightly more than $23M. That would be good for year-over-year sales growth of roughly 23%.
But it won't be about the numbers reported on that day. "It" will be about any guidance the company can provide on future sales to municipalities with a problem.
Fundamentals
Over the past 12 months, Evolv has generated operating free cash flow of -$9.8M, but free cash flow of -$78.9M after accounting for Capex spending. The company ended the most recent reporting period with a cash position of $118.5M, inventory of $9.5M and current assets of $175.8M. Current liabilities added up to $82M, which included no debt, but $47.7M in unearned revenue, which we know is not a true financial liability.
The company's current and quick ratios came to 2.14 and 2.02, respectively, which is very strong. Once adjusted for unearned revenue, these already strong ratios rise further to 5.12 and 4.84.
Total assets amount to $298.7M, including just $7M in intangibles, while total liabilities less equity comes to $152.4M. That still includes absolutely no longer-term debt but does include another $23.8M in unearned revenue.
Here's to hoping that for shareholders sake, New York City adds to that unearned revenue number. All kidding aside, the company may be small, but this is a remarkably well constructed balance sheet.
The Stock
The purple descending triangle in the above chart excludes the pop in mid-February and shows what was probably a premature pop in the share price last week thanks to Mayor Adams. I say premature, because that descending triangle had not closed yet.
The orange upper trendline shows the current, still-descending triangle, including that mid-February pop. That line would appear to suggest that resistance could be found right here.
My idea?
We have more than a month until earnings. Let the Relative Strength Index (RSI) cool off. Let the daily Moving Average Convergence (MACD) cool down. Let the last sale meander in a bit.
The idea would be to get long some shares in between the 200-day simple moving average (SMA) and the 50-day SMA ahead of May 10. If there is a move alluded to at that time, support will likely be found. If there is no such guidance, then we'll have to worry about lower levels. Just an idea.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
