Most of you have probably never heard of ShotSpotter Inc (Nasdaq: SSTI), and, in a perfect world, there’d be no need for such a company. But this isn’t a perfect world, and it never will be.
That said, ShotSpotter is the leader in gunshot detection and location technology.
Now, because gunshot detection technology isn’t something we talk about every day, let me explain a bit about what the company’s software does.
When a gun is discharged, the sound of the explosion, or the shock wave, radiates in a sphere. This explosion is instantaneously identified and analyzed by ShotSpotter sensors within the coverage area.
Within 30 to 45 seconds of the trigger being squeezed the following occurs:
ShotSpotter sensors time-stamp the direction and angle of the explosion.
The precise location of the gunshot is triangulated.
Machine learning technology, in conjunction with highly trained acoustic experts, confirm that the explosion originated from a gunshot (and not a car backfiring or a firecracker).
ShotSpotter sends alerts to 911 dispatchers, patrol cars, police smartphones and other relevant first responders.
According to a 2016 study published by The Brookings Institute, less than 20% of illegal gunshots are reported to the police. And since campus and inner-city police can't respond to unlawful gunfire if they don't know when and where it's occurring, a technology like ShotSpotter has become an unfortunate necessity of many communities.
Huge opportunity, limited competition
It seems odd given the gun violence problem in the US that there aren’t more options when it comes to detecting illegal gunshots. But there aren't. And this means ShotSpotter has a wide-open field with no competition in sight.
With a total addressable market of approximately 1,400 US cities with at least 100,000 residents, 200 cities internationally with at least 500,000 residents, more than 5,000 college campuses, and nearly 2,000 transportation hubs (airports, bus terminals, etc.), this $450-million microcap believes it has a massive growth runway ahead of it.
Too often when I'm hunting for the next multi-year growth story, I discover companies with an innovative product or solution, a fantastic chart with strong price momentum, but a balance sheet that’s over-leveraged -- just drowning in debt -- and at risk of falling apart at a moment’s notice.
That's not the case with ShotSpotter.
Since coming public in early June 2017, ShotSpotter has consistently delivered quarterly revenue gains of more than 40%. In fact, in this year's first quarter, the company posted a 51.4% increase in quarterly, year-over-year revenue growth.
And the company is generating this growth without any debt.
At the end of the first quarter, ShotSpotter reported having US$14.7mln in cash and short-term investments, and no long-term debt. So, while some aggressive investors will argue the company could be growing even faster if it applied a bit of leverage, the bottom line is this company is managing itself in a way that significantly reduces its chances of getting into financial trouble.
Growth isn't cheap!
The one knock against ShotSpotter is that its stock is expensive. It is expensive — in fact, it’s incredibly expensive.
Thanks to ShotSpotter’s incredible performance over the past six-and-a-half months, the stock currently sells for 16.5x trailing Enterprise Value (EV) to Revenues (sales). If we apply a forward revenue figure, we’re still paying nearly 13x EV to Revenue.
Now, while paying 13x revenue may seem like a crazy thing to do, let’s not forget the company is growing its quarterly revenues at an astounding rate. If the company can maintain its current breakneck pace of revenue growth, what looks expensive today may prove to be a bargain a few quarters down the road.
The strong get stronger
Investors will struggle to find anything to complain about when it comes to ShotSpotter's performance since the beginning of the year.
The stock began 2018 around US$14 per share and is currently trading in the low US$40s.
But strong stocks with low debt and growing revenues have a habit of staying strong.
And while some investors may feel they’re discovering ShotSpotter too late into its growth story, remember that this is still a sub-US$500mln company.
The bottom line is ShotSpotter is a fast-growing microcap that over the next few years is likely on its way to becoming a much larger midcap growth stock.
And while the stock is expensive, the company’s business momentum, conservative leadership, and spectacular revenue growth make this a name that should be at the top of every growth-oriented microcap investor’s playbook.
At the time of publication, Bob Byrne had no positions in any of the stocks mentioned.