Evolv: Worth Exploring At These Levels (NASDAQ:EVLV)

Introduction

Evolv Technologies Holdings, Inc. (NASDAQ:EVLV), a micro-cap play on AI-based weapon detection, hasn’t done a great deal of good for its long-standing shareholders since it got listed back in July 2021. For context, whilst other micro-caps have managed to generate returns of nearly 29% since EVLV went public, our focus stock has lost nearly 60% of its value during that time.

EVLV’s track record as a listing entity may have scared a few investors away, but we think this story still has some potential, as EVLV appears to be gaining significant traction in the market of late.

Why We See Merit In EVLV

Domestically, worrying developments such as mass shootings, gun violence, etc. appear to be on the rise, relative to what was seen during the pre-pandemic era, and it is questionable if the security screening structures deployed at various venues and facilities are not just effective enough in weeding out this threat, but also economically competitive.

EVLV is well-poised to address challenges here, as it uses touchless screening which harnesses the power of AI and advanced sensors, to better assess threat levels and generate fewer false positives. Conversely, traditional walk-through metal detectors can typically cause some consternation amongst visitors, and can also be quite unproductive, and cost-ineffective.

Rather, entities that choose to incorporate Evolv’s detection methodology whilst screening their visitors benefit from screening times that are 10x shorter (relative to the traditional set-up). This means less security man power and equipment will be needed, thus potentially bringing down total scanning costs by 70%.

Combine ever-growing security threat levels and a cost-competitive scanning set-up, and you can see why EVLV could see plenty of takers from industries such as educational institutions, sports and entertainment venues, hospitals, industrial warehouses, etc. for its tech. Already management has stated that they currently scan more visitors (last year they crossed the cumulative landmark of one billion visitor scans, and hope to cross the 2bn mark by the end of this year) than any other entity in the world, including the TSA. The runway here is huge, as EVLV estimates that there are still another 400K facility sites in the country where their security screening products could potentially be deployed.

Last year alone, we saw the company’s flagship Evolv Express touchless screening systems being deployed at over 4500 customers, representing a doubling of the unit growth.

Note also that beyond the current year, the company will also see another $160m of performance obligations that will translate to healthy revenue from its existing clients (last year, the company’s overall remaining performance obligation bucket grew by 66% YoY). That doesn’t even tell half the story as by the end of this year, the company intends to cross 7000 customers, which would only expand the bucket even more.

What’s also key to note is that the revenue profile which largely consisted of product-related revenue (58% of group sales in FY22 was linked to product sales) and which is typically a constraint on gross margin progression, is fast-transitioning to a subscription-based profile which generates a healthy dose of low-cost recurring revenue. GMs on EVLV’s subscription revenue came in at +60% last year, whilst GMs on product revenue were -21%.

Annual recurring revenue, which is a function of subscription revenue and recurring services linked to these subscriptions, only accounted for 39% of group revenue in FY22; by the end of this year, it could account for a whopping 94-96% of total revenue.

As a result, gross margins which were at the 45% levels last year are now expected to come in at the 60% threshold by the end of FY24, and that should also give the company the foundation to build on and generate positive adjusted EBITDA by Q2-25.

Some naysayers may be pointing to EVLV’s cash burn and its dwindling net cash position (where cash exceeds debt), but what investors need to note is that a lot of this cash is being deployed in beefing up its property and equipment (CAPEX surged by 3.2x) which largely just involves the purchase of Evolv Express screening systems, which will then be leased to customers, and generate useful subscription revenue over time.

Closing Thoughts – Technical and Valuation Considerations

If we take a bird’s-eye view of EVLV’s weekly price imprints over the last two and a half years, we can see that the stock has chopped around within a broad range, marked by the two black lines. In August last year, it failed to break out of this range, and we saw some pretty strong selling in the weeks that followed. However, note that since October or so, the downtrend appears to have given away to the relative flattening of the price action. As things stand, the stock is now a lot closer to the lower boundary of its long-term range, and a long way off its upper boundary, implying favorable risk-reward. Also note that the ATR (Average true range indicator) which is a measure of volatility, has come off by around 20%, and points to a good opportunity to get in.

A prospective long proposition in EVLV is further bolstered by its rather low relative strength (RS) ratio versus its peers from the tech space. The current RS ratio is around 42% off its trading average, and could likely open up some rotation interest towards EVLV from tech focused investors on the lookout for bargain opportunities in this space.

Investors could likely plump for EVLV here, as it offers pretty good value for the topline potential it offers. We noted previously how business prospects for Evolv have been picking up at a rapid pace; well, based on consensus estimates for the next couple of years, we’re essentially dealing with a business that will see its revenue more than double by the end of FY25. Or, put another way, that translates to 40%+ topline growth two years on the trot.

For such an impressive threshold of topline growth, we see a forward Price to sales multiple of only 3.7x as great value, more so as it also represents a 53% discount to the stock’s rolling average multiple.