EVLV - Evolv Technologies Might Just Save Our Lives

2023-12-01 08:27:03 ET

Summary

• Evolv Technologies is a risky investment but deserves a Buy rating for the long term. It has negligible debt, cash, and growing revenue but needs to improve profitability.
• The share price is volatile but insiders and funds purchase shares when they sell below $4 each.
• Evolv's products address the growing global challenges in the domestic violence defense security industry. It offers AI-powered screening equipment and analytics for weapons detection security teams.

Safer Public Spaces

I read the October '23 opening remarks on national security to Congress by FBI Director Christopher A. Wray. What caught my attention was Wray's pithy, perhaps grizzly assessment and warning that "The reality is that the terrorism threat has been elevated throughout 2023, but the ongoing war in the Middle East has raised the threat of an attack against Americans in the United States to a whole other level." Violence , sparked by ethnic hatred and crime, is upsurging.

Evolv Technologies Holdings, Inc. (EVLV) is, in our opinion, a risky investment for retail value investors. But we think it deserves a Buy rating as share price dips below $4 each. That is also where corporate insiders and hedge funds seem to be active, as well. Corporate insiders were buying shares throughout the first half of 2023 in the $3 per share range. They sold shares in some quantities when the share price hit $4 and over. Likewise, hedge funds increased their holdings by nearly 400K shares last quarter.

Global Business Opportunities Profile

Evolv Technologies is a relative newcomer to the domestic violence defense security industry. Evolv can be a long-term Buy and Hold opportunity facing a slew of risks, but potentially can grow revenue and profits. Its products address the anxiety and fear of violence experienced across the globe. Employing AI, Evolv is on the cutting edge of violence prevention in the fight against acts of domestic terror and violent extremism.

Our mission is to make the world a safer place for people to gather. We take that very seriously and are privileged to work closely with our customers to help mitigate risk and keep the public safe using industry-leading artificial intelligence ((AI))-powered weapons detection and analytics.

Freedom to assemble in Western societies is relentlessly on a downward path. Body searches and scanning machines for knives, guns, and bombs are omnipresent in public spaces; screening machines of varying levels of sensitivity operate in airports, concert stadia, casinos, workplaces, hospitals, schools, and even houses of worship.

Wray's warnings come on the heels of the gruesome Hamas rapes, murders, and kidnappings of Israeli civilians and a series of terror attacks in other Western countries: the knifing of children in Ireland , rapes and killings of women and children in West Darfur , monthly bombings in Sweden , and recent terror attacks in France , UK , and Brussels . In the first 10 months of 2023, there were 520 shootings in the U.S. killing 621 and injuring 2,126. The White House has a national strategy implementation plan for countering domestic terrorism.

Founded in 2013, Evolv's IPO happened in 2020. Evolv Technologies Holdings, Inc. develops and generates revenue through direct sales of touchless people screening equipment and analytic feedback to security teams. Sales complement subscriptions of security screening devices using artificial intelligence ((AI))-based. The company claims , "the Evolv Express® systems have collectively detected and stopped more than 355K weapons since 2022," as reported by company customers.

• Evolv Express® can distinguish between weapons and everyday items in person. It is a touchless security screening system detecting firearms, improvised explosive devices, and tactical knives.
• Individuals brandishing guns can be spotted by Evolv Extend™ up to 100 feet, depending on the gun type and orientation; the system "analyzes 4K high-resolution video streams and leveraging AI."
• Evolv's Mass Notifications communications response system will issue Request Assistance alerts.
• Using VMS Integrations from Evolv will alert in-house security teams no matter their location in the venue, shortening response time and heightening awareness of threats.

Investing Risks And Rewards

We like Evolv, although we view it as a high-risk investment opportunity. The first risk is the share price volatility. In 2021, the share price hit $10.03, tumbled to $1.79 in 2022, and later climbed to $8.30 for its 52-week-high. In 2023, the share price over the last 12 months is up 17.4% and 64% YTD. Weakness is dominating now. Shares are moving up and down around $4 each.

A second risk can be seen in Seeking Alpha's Quant Rating. Through 2022, the Quant Rating shifted from Sell to Strong Sell and back again. This year, the Quant Rating is almost uniformly rated Hold with a brief spell of a Sell rating. Momentum softened as the share price weakened.

Over the past 3 months, the company's Factor Grades markedly improved. Investors and analysts anticipated better Q3 financials reported on Nov 9, '23. The price briefly topped $4.50 on Nov 13 but dropped again.

Highlights of the company's Q3 earnings report and management are

• Q3 Non-GAAP EPS of -$0.08
• Revenue of $20.19M (+22.1% Y/Y).
• Q3 Ending ARR of $65.8M +129% Y/Y
• Q3 Ending RPO of $221.1M +102% Y/Y
• Q3 Ending Evolv Express subscriptions of 4,014, up 137% Y/Y
• 600 new multi-year subscriptions were added along with 70 new accounts
• 4K screening unit deployed with management anticipating nearly doubling that number ending FY '24
• There were +200M visitors to customers' venues in Q3 or 2xs Y/Y and more than USTSA and peers in the domestic violence defense security industry giving Evolv an advantage in market power
• Management has stated a favorable forward outlook outperforming in 2023 and FY'24 gross margins of ~60%

On the strength of substantial revenue and customer numbers expansion, the Factor Grades assigned by S A moved up.

The good news is offset by reported losses and cash flow issues. They represent a third risk to investors. Outlooks are guesstimates and conditions can change at any time. For the 9 months ending September 30, '23, revenue was $58.6M, an increase of 71% compared to $34.3 for the 9 months that ended September 30, '22. The net loss for 9 months in 2023 was $89.4M, i.e., the company lost $0.60 per basic and diluted share versus a net loss of $58.1M or $0.40 per basic and diluted share Y/Y.

Continuing growth in revenue and customer acquisitions are touted as the inspiration for bright forecasts. For example, the consensus is Evolv is probably going to have an EPS loss of $0.71 in FY '23, -$0.41 EPS in '24, and -$0.21 EPS in '25. The risk to investors is whether Evolv can more quickly produce profits, and lift the current ROE (-58%), and ROA (-38.4%).

The company last reported a total debt of ~1.8M and $139M in cash, so debt is a negligible risk factor. However, even with the share price hovering around $4 each, short interest is nearly at 10% presenting another risk to investors.

Takeaway

Our experience in business suggests that lasting power comes if a company can stay in business for 5 to 8 years. The larger it grows, the more formidable the risks. Financial risks are always lurking and Evolv needs to produce profits; the metrics for Evolv's profitability are uniformly D and F grades. Though debt is not a risk factor, Evolv investors need to keep a watchful eye on its cash burn to cashflow breakeven. That can become risky if margins fall much lower than 30%. If management turns to borrowing to support growth, profitability can be more than 2 years away.

Evolv is tentatively expected to announce its next earnings report on March 11, '24; even with added revenue the continuing demand to reinvest in AI tech and marketing expenses to build the customer base, we expect, are going to limit EPS to a slight improvement, perhaps a penny or two from Q4 '22's -$0.12 EPS. Share price seems to move on revenue and customer base growth information more than earnings and cash flow data.

Then there are other sources of risk, like critics of the industry and the company's products' effectiveness in creating weapons-free safe zones.

Anxiety and fear are the driving forces for growth. They underpin our Buy rating. Growth potential outweighs all the risks we identified because from a small bar in Maine to a Denver sports center firm contracting with Evolv, there is going to be a huge demand for the unique security screening and analytics this company offers.

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