Evolv Technologies: My Top Pick For 2023 (NASDAQ:EVLV)

Security is an important issue and one that divides Americans. Do guns make us safer or less safe? Evolv Technologies (NASDAQ:EVLV) comes down squarely on the gun-free side. The small-cap’s signature product is a walk-through metal detector that uses artificial intelligence (A.I.) to distinguish guns from other forms of metal.

I think this is a breakthrough device. It’s ten times faster than ordinary metal detectors. No more delays as security guards check your bags or wave wands over your person. With its solution that combines speed with safety, Evolv is revolutionizing security in the U.S.

This company is just a small-cap right now, with a $500 million valuation. Here’s why I think this stock could grow into a large-cap over time. And why this stock is likely to be a big winner in 2023.

Evolv’s A.I. solution solves a pain-point with the status quo

Companies are adapting the Evolv device because, like a lot of tech breakthroughs, it’s faster and cheaper than existing technology. Traditional metal detectors (i.e. “dumb” machines) need humans to wave the wands or watch the X-rays. This is both expensive and slow. It’s expensive because you have to pay salaries to all the people you hire for security. And it’s slow because the dumb machines create a lot of false positives, beeping at innocent metal and causing bottlenecks in the line.

Evolv’s device uses artificial intelligence to identify actual guns as opposed to innocent metal that people are carrying on their person. Some examples of “innocent metal” might include an underwire bra, or the aluminum in a candy wrapper, or metal implants. If the dumb device is sensitive to small traces of metal, it will go off all the time. If it’s insensitive, it might miss a weapon.

That’s why the dumb metal detectors have historically not been very popular. If you think about airports or courthouses — where metal detectors are routinely used — the security is top-of-the-line. But it creates extensive bottlenecks in crowd control and annoys everybody.

Or consider a church. There are churches that want to protect congregations from gun violence. But they can’t (and won’t) hire security guards to wave wands in front of everybody going into church. In churches, in hospitals, in schools, we want the security to be invisible or next-to-invisible. We want to feel safe, and we do not want to be paranoid.

How it works

The idea of the Evolv device is that security will be completely nonintrusive. You walk through the Evolv device at normal speed. The metal detector, infused with artificial intelligence (A.I.), is highly sensitive and detects even faint traces of metal.

The big difference is with the A.I. The machine is designed to eliminate false positives that cause security bottlenecks and makes the customer experience unpleasant. The A.I. hardware and software examines the metal that has been detected and makes the judgement call whether that metal is a weapon.

It’s this A.I. breakthrough that has made going through an Evolv scanner far quicker and easier than a routine TSA checkpoint at an airport. No, you don’t have to remove your shoes. Yes, you can bring bottled water in. Walking through the Evolv device at normal speed is ten times faster than other approaches.

Indeed, I would suggest the closest analogy to the Evolv device in terms of ease-of-use for the public are those devices we walk through in grocery stores, bookstores, and other retailers. You know, the devices that are checking to see if you are shoplifting something. These are not metal-detection devices. They are RFID machines, or something similar, designed to foil thieves trying to leave with unpaid merchandise. These machines go off if your items have not been waved through a scanner.

Evolv’s devices are similar, except they are working in the arena of metal-detection. There are no RFID tags or anything like that. The highly sensitive smart machine detects metal, and also detects if that metal is in the shape of a weapon.

Over 50,000 weapons were identified by Evolv devices in Q3. And recently the Department of Homeland Security (DHS) certified that the Evolv Express machine had met the SAFETY Act designation for security screening. It’s the only high-throughput weapons detection screening system to be awarded this designation. With Evolv, you can ensure safety and simultaneously let the public into your establishment quickly, with a minimum of fuss.

So this is a major breakthrough and I see potentially a very large upside as more and more public arenas, amusement parks, stadiums, hospitals, schools, and churches look to improve their security and keep guns out.

The future of security

The adoption rate for Evolv Express has been phenomenal. Evolv’s machines scanned 100 million people in Q3. Overall, 425 million people in North America have passed through the Evolv machines. That’s second only to the number of people scanned by the Transportation Security Administration (TSA).

In Charlotte, where I live, Evolv has been growing like gangbusters. In Q3 the company reported a major win in the public school system. Charlotte had already bought the devices for all the high schools earlier this year. The school system was so happy with those devices, it elected to buy machines for all the junior high schools as well. Here’s what CEO Peter George said on the call.

Our largest transaction in Q3 was the 90-plus unit expansion order for the Charlotte-Mecklenburg School District in North Carolina, as they accelerated their move beyond the District High Schools and into the middle schools. Within just nine months, that district has gone from being a qualified lead to our single largest education customer, with over 160 Evolv Express units deployed across dozens of buildings. And remember, we consider Charlotte-Mecklenburg school district as one customer in our customer count.

How many corporate customers does Evolv have? Almost 1,700. So it’s very early days. And it’s exciting because of all the potential market verticals.

For instance, the machines are in 70 hospitals in the U.S. (The company added a dozen hospital clients in Q3). That’s barely scratched the surface as there are 6,000 hospitals, just in the U.S. And the education market is far, far bigger. There are 130,000 schools in our country, not including colleges and universities. The majority of these schools have no real weapons detection solutions at all. It’s a greenfield opportunity in these markets.

Evolv is already in 6 of the top 100 school districts in the country (five of those were added in Q3). Early adapters are jumping in now. I think it’s a good idea to buy shares of this stock in 2022, the most bearish market I’ve seen in a decade.

What could go wrong?

It’s not too difficult to see some potential pitfalls with this stock. One, the company is not profitable yet. I love the amazing revenue growth. Even in this horrible environment, when a lot of folks think we are heading into a recession, Evolv’s numbers are incredible. The company reported 96% revenue growth in its most recent quarter. That’s fantastic. Management dramatically increased sales guidance for 2022 in Q3. The forecast was $30 million for the year; now it’s $47 million.

But the overall numbers are still tiny. The company only had $16.5 million in sales in the third quarter. So there’s still a danger that a much larger competitor (with a far bigger sales force) enters the market and sweeps this tiny innovator aside.

How big is that risk? In its 10-K, Evolv does not list any competitors per se. That is to say, Evolv does not list any AI competitors, because Evolv is the top dog and first mover in bringing AI to metal detection. So its main competitive threat is “inertia” and “status quo” (i.e. large venues believing they do not need a security upgrade).

Since Evolv established the market, however, we have seen a host of tiny copycats try to follow the market leader. These companies are all private so there’s no telling what their numbers are like. Perhaps the most dangerous one is Ambient.ai (I say that based on a similar number of employees).

Evolv has a global strategic original equipment manufacturer (OEM) agreement with Motorola Solutions (MSI). Motorola is an investor in the company and sells co-branded version of the Evolv devices through its network of 2,000 resellers and integration partners. Stanley Security (also an investor in Evolv) and Johnson Controls (JCI) are two of the other major distributors for these devices.

Another warning sign for Evolv investors is the company’s lack of profitability. Seeking Alpha gives this company a failing grade. I’m not too worried about this, though. I expect early-stage companies like this one to be unprofitable. What’s nice about tech companies like Evolv is that you scale to profitability as you grow.

That’s because a lot of the costs are fixed. So what we want to see is Evolv grabbing as much market share as it can right now. This business is a platform, like Intuitive Surgical’s robot surgeon. Every machine Evolv places becomes a future revenue stream for the company.

Still, with an unprofitable company, you want to pay attention to cash and the burn rates. Evolv has $11 million in debt and over $200 million in cash. The company burned around $24 million in Q3.

Finally, investors need to recognize that this is a very ugly environment right now. Evolv’s stock has dropped 36% over the last year. That’s actually not bad at all, given how hammered the high-growth market has been hit. The stock fell all the way down to $2 back in November, and it’s done well since then. But no question that overall the stock’s momentum has been bad in 2022. While I’m bullish for January, I expect there will probably be hedge funds taking losses in this stock in December for tax purposes.

The best stock in 2023?

I’m bullish on Evolv because it’s growing super-fast, and the company’s stock has gotten quite cheap. For instance, the price-to-sales ratio is now 13, down from 71 over a year ago. So it’s entirely possible that if the bulls roar back, we will see this stock jump a lot higher.

But perhaps the most interesting part of the Evolv story is that it’s a defensive stock. A lot of companies don’t want to invest in technological innovation in a recessionary environment. But as a security company, Evolv can see demand even in a bad economy.

Any time there’s a terrorist attack or a mass shooting, demand for security solutions likely will grow and grow. Crime rates have been going up and a lot of people are scared. While that’s a negative for our society, it’s actually a very bullish environment for Evolv. So even if we slide into a recession, Evolv can still grow sales as more and more people demand gun-free zones in large public venues. So this is my top pick for 2023 (especially if we veer into a recession).

Editor’s Note: This article was submitted as part of Seeking Alpha’s Top 2023 Pick competition, which runs through December 25. This competition is open to all users and contributors; click here to find out more and submit your article today!