AWS And NVIDIA Partnerships Will Ensure Reliable AI Platforms

Key Takeaways

• Rekor's strategy shift to a stable revenue base and strategic partnerships is reducing dependency on uncertain contracts and enhancing market presence.
  
• Its scalable pay-for-data model and advanced AI investments drive recurring revenue and competitive edge in transportation and public safety.
  
• Rekor Systems faces challenges with profitability, leadership instability, and competitive pressure, potentially impacting revenue predictability, market share, and investor confidence.

Catalysts

A technology company, provides infrastructure solutions for transportation, public safety, and urban mobility markets in the United States and internationally.

• Rekor is shifting from reliance on uncertain government contracts to a strategy based on its current, healthier and more predictable revenue base, aiming to achieve breakeven and protect shareholder value. This shift is likely to have a stabilizing impact on net margins as it reduces dependency on external timelines.
  
• The company's strategic partnerships with AWS, NVIDIA, and others enhance the reach and capabilities of its AI-driven transportation platforms, suggesting potential revenue growth through expanded market presence and advanced technology solutions.
  
• Rekor’s pay-for-data business model offers a scalable, flexible approach to traffic data management, aligning with the increasing demand for safer, real-time data capture solutions. This model likely contributes to higher recurring revenues as more DOTs adopt it.
  
• The company's concentrated efforts on refining financial processes and reducing costs have resulted in a significant reduction in EBITDA loss, which is projected to continue decreasing as revenue grows and operational efficiencies improve.
  
• Rekor's investment in expanding its intellectual property portfolio and advanced AI features in its core solutions positions the company to enhance its competitive edge in AI-based solutions, likely driving revenue and gross margin growth from high-value contracts in the transportation and public safety sectors.

Rekor Systems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rekor Systems's revenue will grow by 14.7% annually over the next 3 years.
• Analysts are not forecasting that Rekor Systems will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Rekor Systems's profit margin will increase from -133.4% to the average US Software industry of 12.0% in 3 years.
• If Rekor Systems's profit margin were to converge on the industry average, you could expect earnings to reach $8.4 million (and earnings per share of $0.06) by about April 2028, up from $-61.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 82.6x on those 2028 earnings, up from -1.5x today. This future PE is greater than the current PE for the US Software industry at 29.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.59%, as per the Simply Wall St company report.

Rekor Systems Future Earnings Per Share Growth

Risks

• Rekor Systems is shifting away from relying on large government contracts due to uncertain timing, which could impact predictable revenue streams and lead to shareholder dilution risks. This transition might weigh on revenue growth.
  
• The company is facing timing delays in the recognition of recurring revenue, as evidenced by a modest 2% year-over-year decline, which may affect steady earnings and predictability of cash flow.
  
• Despite strong revenue growth, Rekor reported a substantial adjusted EBITDA loss for 2024, underscoring ongoing profitability issues, which could impact net margins and investor confidence in near-term financial stability.
  
• Continued leadership changes, including the resignation of the CEO, may introduce uncertainties in strategic direction and execution risks, affecting long-term financial and operational stability.
  
• Competitive pressure from better-funded rivals like Flock Safety in the license plate reader market could constrain Rekor’s market share expansion and potentially impact future revenue opportunities within the public safety segment.

Valuation

• The analysts have a consensus price target of $4.0 for Rekor Systems based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $69.5 million, earnings will come to $8.4 million, and it would be trading on a PE ratio of 82.6x, assuming you use a discount rate of 8.6%.
• Given the current share price of $0.82, the analyst price target of $4.0 is 79.4% 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.