With a tense political climate and calls for police reform, the spotlight has been shone on these two stocks, but are they worthy of investment?
The death of George Floyd has sparked protests and conversations in the U.S and abroad. This debate may spark change in the tools that police officers use and the preventative measures in place. We delve into Wrap Technologies Inc (NASDAQ: WRTC), and Shotspotter (NASDAQ: SSTI), which aim to solve two different problems in the same field.
Shotspotter
Shotspotter offers a unique product consisting of acoustic sensors in an area that locate and detect noise, and acoustic experts determining whether it was a gunshot. The company went public in 2017, and the stock has been somewhat volatile since then.
The bull case for Shotspotter:
Shotspotter claims that 90% of the incidents in the area they cover are reported within 60 seconds, and the timing of the response is crucial to law enforcement.
There are more guns than people in the United States, and the number of gun murders increased by 32% between 2014-2017. This increase demonstrates the role that Shotspotter's technology can play and a market for the product. It is deployed in 101 cities, predominantly in the U.S, but has also expanded into Puerto Rico and South Africa. Although it is a small-cap business valued at roughly $270 million, this international expansion illustrates that there is significant room to grow globally with talks in Brazil and Mexico "progressing."
Although Shotspotter Flex is the flagship product, it has also been diversifying with new products, while international revenue accounts for around 5% of total revenue. The revenue retention rate stood at 111% for 2019. At the end of the first quarter, Shotspotter had 735 live miles, which leaves a considerable runway for growth.
The bear case for Shotspotter:
The adoption of Shotspotters technology is fundamental in driving growth, and there is a reliance on New York and Chicago, which account for over one-third of revenue.
In the latest quarter, Shotspotter reported $10.5 million in revenue, an increase of 9% year-over-year with gross margins remaining consistent at 58%. A 9% increase for a small-cap company is not particularly attractive and would be more consistent with a large-cap company, while a 12% increase in Q4 is not significantly better. Shotspotter also withdrew full-year guidance due to the impact of COVID-19.
Wrap Technologies
The Bola Wrap was invented by serial inventor Elwood Norris with the mentally ill in mind and is the sole product of Wrap Technologies that went public in 2016. The BolaWrap has been described as: "An innovation that is changing the world of policing" as it restrains people without lethal force or injury.
The bull case for Wrap Technologies:
The BolaWrap fills the gap between verbal commands and using force such as the taser, which is made by Axon Enterprise Inc. (NASDAQ: AAXN) or pepper spray, which may cause injury. The non-lethal weapons market is expected to double from just over $6 billion in 2016 to nearly $12 billion in 2023.
There have been increasing requests for training, demonstrations, and quotes from more than 1,700 alone in the U.S and a further 600 internationally. In 2019 alone, more than 140 police departments received the BolaWrap in the U.S with devices in 27 countries worldwide. There has been increased demand in recent times, for example, Indonesia's police department, with 387,000 members who have made a follow-on order. Revenue from recent sales will not be recognized until Q2 or Q3 of 2020, where we could potentially see a significant increase. There is enormous upside potential for this product with private security firms and the military who could also be customers.
The latest quarter revenue totaled $689,000, which is nearly equal to its total 2019 revenue with $15.5 million in cash on the balance sheet and $150,000 in long term debt. This high growth is more typical of a young company, and provided they can continue to bring on board more police departments; high growth should be sustainable for the foreseeable future.
The bear case for Wrap Technologies:
Wrap Technologies is a micro-cap company, and with this comes volatility and a higher degree of risk. The company is unprofitable and has spent $2.1 million on selling and admin costs, such as advertising. This is likely to continue to build a brand and spread awareness, but this comes at a price and is worth watching.
These two companies aim to reduce harm and better society through the use of their products.
Both Wrap and ShotSpotter come with significant risk due to the size and nature of their products, but I would argue that Wrap Technologies is a better addition to a diversified portfolio.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above Read our full disclosure policy here.
