Municipal Budget Constraints Will Hurt Momentum But Spark Cautious Optimism

Key Takeaways

• Legislative uncertainty, budget constraints, and concentration risk could impede the adoption of new products and create unpredictable revenue growth across targeted sectors.
  
• Investments in AI and international expansion offer growth potential but pose risks of elevated costs, delayed revenue, privacy concerns, and limited long-term market penetration.
  
• Dependence on volatile municipal budgets, unpredictable contract renewals, and delayed product adoption could cause unstable earnings and constrain long-term growth prospects.

Catalysts

A public safety technology company, provides data-driven solutions and strategic advisory services for law enforcement, security teams, and civic leadership.

• Although legislative mandates such as California's AB 2975 are set to drive increased demand for SafePointe in hospitals and potentially inspire similar requirements in other states, the company faces a material risk that hospital budgets remain constrained or legislative follow-through is delayed, which could ultimately slow adoption and defer expected revenue growth from this new vertical.
  
• While SoundThinking is seeing greater traction internationally, with recent renewals and new deployments in Brazil and other Latin American countries that could substantially increase revenue due to higher pricing, international contract cycles are even longer and more unpredictable than domestic ones, which could result in lumpy revenues and delayed cash realization despite a growing addressable market from urbanization and public safety awareness.
  
• Though advances in generative AI and platform integration, such as the enhanced CrimeTracer and PlateRanger features, should improve customer retention and margin through higher-value contracts, increased investment needs for AI R&D and cloud infrastructure are raising operating expenses-if technological advancement outpaces client readiness or fails to reduce churn, net margin expansion may be limited.
  
• Despite expanding its suite beyond ShotSpotter and aiming to reduce reliance on municipal contracts by moving into healthcare, casinos, and enterprise, the company continues to face concentration risk and budgetary volatility, as evidenced by headwinds around major renewals and ongoing discussions with public sector clients, which could create continued unpredictability in both earnings and topline growth.
  
• Although heightened public and institutional focus on safety and data-driven law enforcement is likely to fuel long-term demand for SoundThinking's offerings, persistent concerns over privacy, evolving regulatory scrutiny, and potential shifts toward less surveillance-oriented methods could limit market penetration, ultimately capping the long-term growth runway and impacting recurring revenue streams.

SoundThinking Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on SoundThinking compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming SoundThinking's revenue will grow by 7.4% annually over the next 3 years.
• The bearish analysts are not forecasting that SoundThinking will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate SoundThinking's profit margin will increase from -7.4% to the average US Software industry of 13.4% in 3 years.
• If SoundThinking's profit margin were to converge on the industry average, you could expect earnings to reach $17.4 million (and earnings per share of $1.45) by about August 2028, up from $-7.8 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 16.8x on those 2028 earnings, up from -18.2x today. This future PE is lower than the current PE for the US Software industry at 36.9x.
• Analysts expect the number of shares outstanding to decline by 0.86% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.57%, as per the Simply Wall St company report.

SoundThinking Future Earnings Per Share Growth

Risks

• The company highlights ongoing headwinds related to municipal funding and budget volatility, which could result in higher customer attrition and less predictable revenue streams as cities face financial pressures and shift budget priorities.
  
• Dependence on delayed and lumpy municipal contract renewals, as seen with New York City and the prior loss of the Chicago ShotSpotter contract, exposes SoundThinking to potentially irregular revenue recognition and creates earnings instability over time.
  
• Heavy investment in R&D, AI modeling, and AWS tools, combined with increased operating expenses, may pressure net margins in the coming years, especially if new products like SafePointe and PlateRanger do not scale as anticipated.
  
• Slow international sales cycles and proof-of-concept stages in new markets may delay the realization of global revenue growth opportunities and limit near-term earnings contributions from outside the core US government sector.
  
• As the company's main growth opportunity in SafePointe is driven by unfunded legislative mandates, hospitals and other institutions may face financial constraints or opt for minimal compliance, potentially resulting in lower-than-expected revenue per site and constraining long-term top line growth.

Valuation

• The assumed bearish price target for SoundThinking is $19.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of SoundThinking'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 $30.0, and the most bearish reporting a price target of just $19.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $130.0 million, earnings will come to $17.4 million, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of $11.16, the bearish analyst price target of $19.0 is 41.2% 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.