Government Delays And Tough Competition Will Constrain Then Yield Progress

Key Takeaways

• Heavy dependence on public funding and slow procurement cycles create ongoing revenue volatility and limit near-term growth visibility.
  
• Rising operational costs and competition from lower-cost alternatives jeopardize long-term margins despite strong recurring revenue streams and international expansion opportunities.
  
• Heavy reliance on unpredictable government contracts, margin compression, and rising competition threaten revenue stability, profitability, and the durability of recurring earnings.

Catalysts

Provides use of force training and firearms training simulators for the law enforcement, military, and commercial markets worldwide.

• While VirTra continues to benefit from a multi-year increase in global security concerns and heightened regulatory requirements for police and military training, the company's heavy reliance on public funding subjects it to persistent budgetary cycles and funding delays; this exposes revenue to volatility even as long-term demand should support future growth.
  
• Although the reopening of major grant programs, such as the DOJ COPS grant and reentry into the GSA procurement channel, could unlock order activity in the near-to-medium term, the protracted nature of agency procurement cycles and unpredictable timing of budget resets will likely continue to limit visibility and slow revenue conversion from backlog.
  
• Despite strong customer interest and high renewal rates above 95% for STEP subscription programs-offering improved recurring revenue and margin visibility-a shift towards alternative conflict resolution methods and community-based policing could reduce the long-term total addressable market, potentially curbing growth in recurring revenues.
  
• While international expansion offers significant upside as defense and law enforcement modernization accelerates in various regions, execution risk remains as VirTra faces competition from both established multinational players and cheaper off-the-shelf VR/AR solutions, which could erode pricing power and eventually squeeze margins.
  
• Though VirTra's ongoing R&D investment and product innovation (exemplified by V-XR and integration with major simulation platforms) fortify its competitive position, rising operational expenses and the need for continuous technological advancement may outpace revenue growth, putting pressure on future net margins and earnings.

VirTra Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on VirTra compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming VirTra's revenue will grow by 8.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.2% today to 20.0% in 3 years time.
• The bearish analysts expect earnings to reach $6.9 million (and earnings per share of $0.6) by about August 2028, up from $1.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.9x on those 2028 earnings, down from 53.4x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 34.2x.
• Analysts expect the number of shares outstanding to grow by 0.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.88%, as per the Simply Wall St company report.

VirTra Future Earnings Per Share Growth

Risks

• Ongoing and potentially recurring delays in federal and international government funding, as well as elongated agency procurement cycles, pose a risk to revenue predictability and can lead to shortfalls in quarterly or annual sales, negatively impacting both top-line revenue and earnings over the long term.
  
• VirTra's financial results show a significant contraction in gross margin, falling from ninety-one percent to sixty-nine percent year-over-year this quarter, largely due to less favorable revenue mix and the absence of capitalized labor, which could signal a trend toward lower profitability and margin compression if high-margin service contracts do not rebound.
  
• Heavy dependence on public sector contracts for both law enforcement and military creates exposure to government budget cycles, policy changes, and political risk, all of which can result in long-term revenue volatility and threaten the durability of earnings growth.
  
• The simulation and training industry is facing increasing competition, particularly as larger firms or well-funded tech companies such as Meta and Android pursue aggressive development and funding strategies in augmented reality headsets and related systems, which could reduce VirTra's market share and pressure both revenue growth and net margins.
  
• The shift in the STEP subscription model from five-year to three-year terms initially met customer budgetary resistance, and although renewal rates have remained high, any future decrease in renewal momentum or customer adoption could undermine the company's recurring revenue base and long-term earnings visibility.

Valuation

• The assumed bearish price target for VirTra is $7.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of VirTra's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $9.5, and the most bearish reporting a price target of just $7.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $34.7 million, earnings will come to $6.9 million, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $5.38, the bearish analyst price target of $7.0 is 23.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.