Airship AI: A Strategic Long-Term Opportunity In AI Video Surveillance (NASDAQ:AISP)

Airship AI Holdings (NASDAQ:AISP) is part of the latest wave of SPAC IPOs to hit a major bourse in the U.S. Listed on the Nasdaq as of December 2023, this vertically integrated AI video surveillance hardware and software company looks like one of the more attractive plays in the space right now. Overvalued on a trailing basis, perhaps, because FY23 wasn’t a great year for the company; however, I believe the timing is right to invest in AI smallcaps that have reasonable net cash positions and promising pipelines from some of the most notable clients in the United States – Homeland Security, the DoJ, the Navy, state police departments, and a couple of well-known Fortune 500 companies so far.

About Airship AI

Airship AI Holdings is a 2006-founded, Redmond, WA-based AI company that offers an integrated video and sensor-based surveillance platform that collects data at the edge, helps manage that data, and provides actionable visualizations based on AI analytics. As you can imagine, its solutions have strong appeal with governmental agencies and enterprises responsible for public safety, border security, the safe movement of goods (transportation and logistics), and essentially any entity that requires edge-level support for real-time surveillance and analytics. As a vendor to the U.S. government, AISP has the authority to operate or ATO in networks that are forbidden to most, specifically managed and cloud networks (FedRAMP High) of the U.S. government that carry highly sensitive data that requires high availability, integrity, and confidentiality; as the FedRAMP website puts it, “data that involves the protection of life and financial ruin.”

The company offers a suite of products comprising the Airship Acropolis OS platform itself, which is a fully integrated operating framework for analog and digital (or IP) video, Airship Command, a data visualization interface that links directly to the sensors and edge IoT components that make up a surveillance and security network, and Airship Outpost, which is the actual ‘edge’ in this configuration.

In simple terms, the company offers everything that an enterprise or government agency needs to manage the huge amount of data from a highly distributed array of sensors and cameras and eke out every bit of data intelligence that AI at its current stage of development can manage to generate. In short, it is intended to make the preservation of life and the protection of property infinitely easier than is possible with manual or semi-automated systems.

My Thesis: Why This Company, Why Now?

As I said, the company’s been around since 2006, and that’s only officially. According to a GeekWire report published ahead of the Nasdaq debut, the company’s roots go back to 2003, when co-founders Victor Huang (current CEO, board chair, and Director) and Derek Xu (current COO, Secretary, Director, and Treasurer) launched their startup. A source of understandable pride for the duo is the fact that the company has never raised a penny in outside capital, which I think is extremely rare nowadays. Bootstrapping isn’t what it used to be, sadly, and modern startups are flush with funds from VCs, angel investors, and other private entities as long as they can keep showing growth at the top line, bottom line be damned in many cases.

It wasn’t until 2010, however, that the company finally found its feet as an AI player. Now, you have to see this in perspective. AI in 2010? Yes, AI’s been around since the mid-1950s, but it’s been falling in and out of favor as a mainstream technology since then, and it was not until 2010 that AI really came into its own. The world was coming out of a global recession, data was plentiful (for AI training), and the now-ubiquitous GPU, or graphics processing unit, was an eager preteen ready to conquer the world.

Without the availability of massive amounts of data (courtesy Alphabet’s Google (GOOG)) and the processing power required to crunch numbers at AI levels (courtesy Nvidia (NVDA)), Airship AI may have never found its calling. Of course, the right economic environment was also a key enabler, and the world was just exiting one of the worst recessions in modern times. As such, this trifecta of catalysts was the fuel that ultimately fed Huang’s and Xu’s dream of leading a successful startup. That’s how I see it.

Over the last fourteen years or so, the company has built a strong suite of products and services, but the best part is that the company has never lost a customer (ref: the same GeekWire report linked above), which reveals its obsession with customer satisfaction. And when that customer is the U.S. government in its myriad of forms, it calls for a level of execution and performance that one should be appropriately impressed by.

That’s the first reason I got interested in this company. I’ve long been an admirer of founder-led startups. That’s a personal idiosyncrasy on my part, I should confess, because I believe that once the leadership outgrows its capabilities, it should take a step back and let the pros run the operations and keep growing the business.

I’ll be the first to argue the other side as well. Founder-led companies have made it to the very top of their game; you only have to look at Meta Platforms (META), Tesla (TSLA), and Berkshire Hathaway (BRK.B) to realize that. However, there’s overwhelming evidence pointing to the fact that successors to the founder(s) can often take it much, much farther. Critics might say that Apple (AAPL) is only living off the legacy of one of its founders’ light-years-ahead vision, but it was Mr. Cook who took the Cupertino giant all the way. Apple was trading at around $15 when Mr. Jobs passed away, may his soul rest in peace. Today, it’s trading at 12 times that. Even if that’s a case of riding on a legacy vision, it was one heck of a ride!

Of course, Airship AI has a very long way to go before we can compare it to a Meta or a Tesla, but I really like the story here, and that’s one of the reasons I also like the company, its products, and the success trajectory I see for it in the coming years. Please be warned that this is a very long-term thesis, but it could very well be accelerated by the sheer velocity at which AI deployments are dotting the global landscape.

The Dire Need for Security and Surveillance

We live in bad times. I realize this sounds like a very subjective statement, but just look at the trends in defense and security spending, and it’s quite obvious that it’s true.

At the highest levels, nations are stepping up their defense budgets, of which a significant component is security awareness. That translates to video and other sensor-based surveillance methods as a first line of defense, and this press release from last year issued by the Director of National Intelligence, or DNI, should give us some perspective:

The Director of National Intelligence (DNI) is disclosing the aggregate amount of $72.4 billion in requested appropriations for the Fiscal Year 2024 National Intelligence Program (NIP).

That’s just for national intelligence; the Military Intelligence Program requested an additional $29.3 billion, nudging the total to over $100 billion, or more than 11% of defense funding for FY24, as shown below.

Trend-wise, we can clearly see the sharp upward slope in intelligence spending.

I don’t see that changing in the foreseeable future. As ISR (Intelligence, Surveillance, and Reconnaissance) takes centerstage within military budgets across the globe, national and military security are becoming increasingly more preemptive than reactive.

And that’s by no means a new trend. Over the years, America’s foreign policy has gone from Truman’s “containment” doctrine to Reagan’s “support the freedom fighters” tenet to Bush’s “if you’re not with us, you’re against us” war cry. That’s truly biblical, and literally so – Jesus purportedly said, “He that is not with me is against me” – but, unfortunately, in a completely different context. And yet, this divisive cry not only garnered support but became the new law of the geopolitical jungle.

But I digress. My aim with this section of the article is to demonstrate the sustainability of a business model built on the development and sale of video surveillance gadgetry that works on the cloud, on-prem, and at the edge, effectively unifying the field and craft of visual-based AI surveillance. That’s where the real upside to companies like Airship AI will come from, in my opinion.

Why Did The Stock Pop After a Dismal NDX Debut – and Then Correct Again?

Coming back to my company-specific perspective, a major catalyst earlier this month sent the stock soaring from its post-IPO price of under $2 to well over $13. However, that enthusiasm was a little over the top, and the market has rightly corrected the pricing to a more reasonable level under $10. Why do I say that’s reasonable? Well, the valuation part will bear that out, but $1.27 in rev per share on a TTM basis implies a price-to-sales multiple of about 6.7x at the current share price of $8.50 as of this writing, and that’s a little expensive but definitely not over the top for a company that’s AI-centric and expected to grow its revenues in a strong manner, primarily through long-term government contracts. And that brings us to the catalysts that helped the stock pop earlier this year.

Although news flows on upcoming revenue streams began last month, the first real catalyst to move the stock was a March 5 announcement that the company was awarded “a large contract” by an unnamed division of the DoJ. I’m not sure about the timeline, but the project was piloted last year so, worst-case scenario, I’m assuming this was baked into their $162 million pipeline figure reported in June 2023. Regardless, that pipeline is now gradually converting into actual revenues that should boost AISP’s revenues in the years ahead. That should be a welcome relief for revenue growth, which has been in negative territory since the March quarter of 2023 on a TTM basis.

The second catalyst came on the heels of the first announcement, about 10 days later, and revealed yet another government contract, but this time with the Government of Singapore. The same Acropolis Enterprise Sensor Management platform that was contracted to the DoJ will be deployed here as well. This was clearly a smaller contract (“a six-figure multi-year software and services contract”), but it will still move the revenue growth needle in the right direction over the coming years.

The question now is two-fold – should you take a risk on this well-seasoned AI player focused on a niche market within AI systems software space, and how much would you be willing to pay based on future revenues? The answer to the first part is a clear YES as far as I’m concerned because AI has a very long runway right now. Mordor Intelligence pegs forward growth rates at about 33% over the next several years through the end of the decade for the AI video analytics market that AISP operates in.

However, a more narrow view of just the AI video surveillance market from Markets And Markets shows a 2028 figure of $16.3 billion for a CAGR of 23.7%. I think that’s more realistic because it directly addresses AISP’s TAM.

So, there’s definitely growth on the cards for AISP. As a freshly minted public company, it offers more transparency for government agencies and corporations alike, and we should see some strong customer additions and revenue realization from the robust pipeline that we discussed earlier.

The Question of Value

What about value, though? Obviously, we’re not looking at positive cash flows in the near term because the time now is for growth, and growth alone. Profitability will eventually come, but it’s important for the company to invest heavily in OpEx at this point in time. As of the last report, SG&A was a little under 80% of revenues, with R&D now approaching 30%. In liquidity terms, $20 million was to move to AISP’s balance sheet on the merger’s closing. We should see that in the annual report that’s due around this week or next, but no date has yet been confirmed. Understandable, as AISP only recently named an interim CFO in an 8-K filed at the start of March.

I’m not too concerned about current funding, but AISP does need to watch its cash burn, which is currently at around $4.7 million on a TTM basis (from their cash flow statements). There’s no shareholder equity to speak of at the moment, with a deficit of about $12.2 million and operating income or EBIT running at -$1 million for the last reported quarter, so leverage ratios aren’t really meaningful. However, based on the founders’ ‘habit’ of not accumulating debt, I do see some share dilution ahead once the initial SPAC funding to the balance sheet starts to run out. My hope is that these new government contracts will enable the company to pull back on SG&A spending, which is currently the largest OpEx component. That’s just my opinion, to be clear. It’s quite possible that SG&A will head upwards again as the company geographically expands its markets over the next few years. What I’d really like to see is R&D grow alongside revenues. That’s the secret sauce for companies in the AI space right now. We can see this clearly with companies like Nvidia. Although they’re spending less on R&D as a percentage of revenue, the actual dollar spend is on an upward trajectory.

Airship AI needs to keep spending aggressively on R&D to get to the top of its game and stay there, but I’d definitely like to see SG&A scale DOWN from its current levels. True, AISP is newly public so there are additional expenses for regulatory compliance and such, but I’m keeping an eye on that metric over the coming quarters as the company becomes more operationally efficient. Equally, I’d like to see a more aggressive budget for R&D, and my opinion is that we’ll see that dollar figure expand over the next several quarters as revenues start flowing in.

I’ve already mentioned that AISP’s under-7x sales multiple is a reasonable price to pay for this emerging AI player, and that’s where I stand on valuation. The upside, in my opinion, will come from rapid revenue growth but, to be precise, revenue growth stability. These contracts are typically multi-year, which gives investors a good deal of revenue visibility once the initial revenues start flowing in. Moreover, they lend increasing credibility as the company adds more agencies to its roster, particularly in the United States and other developed markets.

Risks and Summary

The biggest risk I see is poor revenue growth. Although we’ve seen a couple of contracts come through this year, I’m hoping there’s more where that came from. The pipeline looks really robust at north of $160 million, but execution is key. I’m confident that management can regularly convert large chunks of this into realized revenues, especially now that they’re past the IPO stage and on the verge of a growth spurt.

I especially like the earnout parameters (page 6) for the 5 million shares allocated to management. The first component, share price performance for 50% of the shares, is contingent on the stock being “over any twenty (20) Trading Days within any thirty (30) Trading Day period the VWAP of the Parent Common Shares is greater than or equal to $12.50 per share”, with the other 50% contingent on a $15 share price under the same conditions. The second component, which involves revenue milestones, triggers a 25% earnout at either the $39 million revenue level for the full calendar quarter from the merger’s closing date OR if federal law enforcement contracts grow by 100% during the one-year period following the closing date. A further 75% is triggered on the quarter immediately following the merger’s three-year anniversary if revenues for that quarter reach or exceed $100 million.

That’s a very reasonable incentive, in my opinion, because it helps management focus on what really matters to shareholders, and that’s also why I’m not overly concerned with the slight overvaluation or even the current SG&A spending, both of which are admittedly major risks at this time. What I’m focused on is sound execution that will eventually lead to robust organic growth, as should you be if you decide to invest at this time.

I believe the timing is right to invest in this name. You may need to wait several years for this investment thesis to play out, but looking at the foundations of this business and the governing principles of the founders, as well as future growth prospects, this definitely looks like a long-term buy and hold to me. You may want to wait until AISP finds a bottom right now – the stock has moved further down since I started writing this article. However, even at the current price, it’s a solid Buy. There’s bound to be some volatility as the market strains to understand this business, but once it does, the upside I predict should start to play out, and I won’t be surprised at all if the stock ends up a ten-bagger or better in the next five years. The key, again, is execution.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.