TxDOT Order And Federal Focus Will Expand AI Markets

Key Takeaways

• Accelerated adoption of Rekor's AI-powered solutions by government agencies and national infrastructure initiatives is fueling growth and expanding long-term market opportunities.
  
• Shift toward SaaS and Data-as-a-Service models is improving revenue predictability, supporting margin expansion, and positioning the company closer to sustaining profitability.
  
• Prolonged sales cycles, declining recurring revenue, lower margins, ongoing losses, and reliance on a few large clients threaten Rekor's financial stability and path to profitability.

Catalysts

Provides infrastructure solutions for public safety, urban mobility, and transportation management markets in the United States and internationally.

• Large statewide blanket purchase order with the Texas Department of Transportation (TxDOT), along with ongoing pilots and multi-year contract expansions, signals growing government adoption of Rekor's AI-powered solutions, expected to drive increased revenue and sequential growth in coming quarters as deployments scale across districts.
  
• Rising emphasis on transportation data as a national asset and increased focus on roadway safety and infrastructure modernization (highlighted by federal programs and bipartisan congressional momentum) are expanding market opportunities and likely to support higher long-term revenue and recurring SaaS/data contract wins.
  
• Recurring revenue base is bolstered by the accelerated shift to Data-as-a-Service and SaaS subscription models (especially with Discover and Command), which is expected to improve revenue visibility and lead to higher gross margins and stable earnings over time.
  
• Continued cost discipline, operational efficiency initiatives, and realignment of resources have resulted in meaningfully reduced operating expenses, which, together with revenue growth, position the company for improving EBITDA and potential path to breakeven.
  
• Rekor's expanding geographic footprint and validation from early adopters enable entry into new states and international markets, creating a runway for organic growth and future backlog-positively impacting revenue growth outlook and supporting enhanced long-term margins.

Rekor Systems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rekor Systems's revenue will grow by 18.6% 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 -115.8% to the average US Software industry of 13.3% in 3 years.
• If Rekor Systems's profit margin were to converge on the industry average, you could expect earnings to reach $10.1 million (and earnings per share of $0.07) by about August 2028, up from $-52.5 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 79.4x on those 2028 earnings, up from -2.7x today. This future PE is greater than the current PE for the US Software industry at 36.5x.
• 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 9.06%, as per the Simply Wall St company report.

Rekor Systems Future Earnings Per Share Growth

Risks

• Prolonged sales cycles and slow procurement processes, particularly within government clients, expose Rekor to significant revenue timing risks and unpredictable bookings, which could result in inconsistent revenue recognition and delays in reaching sustainable growth and profitability.
  
• Recurring revenue as a percentage of total revenue declined year-over-year (from 50.6% to 48% in Q2), indicating heightened reliance on less predictable, point-in-time sales, which undermines revenue stability and long-term gross margin improvement.
  
• Adjusted gross margins declined from 53.5% to 49.5% year-over-year, driven by a greater proportion of hardware-based contracts versus higher-margin SaaS/software sales, highlighting vulnerability to future margin compression, especially if hardware sales continue to make up a larger revenue share.
  
• The company continues to operate at a significant adjusted EBITDA loss ($5.8 million for the quarter, $13.1 million year-to-date) despite reductions in operating expenses, suggesting persistent challenges in achieving profitability and risking further dilution or constrained investment in R&D and growth initiatives.
  
• Customer concentration risk remains heightened, as current deployments and contracts are mostly with a few state and regional transportation agencies; the loss, delay, or non-renewal of a major contract (such as further TxDOT district rollouts) could cause sharp revenue declines and earnings instability.

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 $75.7 million, earnings will come to $10.1 million, and it would be trading on a PE ratio of 79.4x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $1.11, the analyst price target of $4.0 is 72.2% 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.