Municipal Delays And Regulatory Hurdles Will Underpin Cautious Optimism

Key Takeaways

• Exposure to municipal budget cycles, contract concentration, and procurement delays adds volatility to revenue and increases risk of abrupt financial disruptions.
  
• Regulatory, political, and competitive pressures could restrict adoption, limit market share expansion, and constrain long-term earnings growth.
  
• Dependence on large contracts, political scrutiny, rising costs, competitive threats, and international expansion challenges create significant revenue volatility and long-term growth risks.

Catalysts

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

• Although SoundThinking is expanding its addressable market through the addition of critical infrastructure, health care, and international deployments-areas with large and underpenetrated demand for gunshot detection and public safety technologies-the company remains highly exposed to municipal budget cycles and procurement delays, which could lead to revenue lumpiness and missed financial targets.
  
• While ongoing investments in AI integration, the development of advanced gunshot detection sensors, and broader data-driven safety platforms could increase cross-selling opportunities and improve gross margins, intensifying regulatory scrutiny around privacy and evolving data protection laws could restrict adoption, ultimately constraining long-term earnings growth.
  
• Despite healthy pipeline visibility and recurring revenue from multi-year SaaS contracts, SoundThinking's heavy reliance on a limited number of large municipal customers, seen with issues surrounding contract renewals and unexpected RFP processes such as in Puerto Rico, creates continued risk of abrupt revenue disruptions and greater net loss volatility.
  
• Although secular trends such as persistent urban gun violence and growing demand for public safety analytics are driving municipal and enterprise spending in the short run, mounting political pressures for policing reform and public resistance to expanded surveillance capabilities could trigger a shift in public funding priorities, jeopardizing future top-line growth potential.
  
• While integration with complementary technologies-such as drones and license plate recognition-improves SoundThinking's product differentiation and increases customer stickiness, the emergence of highly capitalized competitors and the risk that large-scale smart city contracts will increasingly favor diversified public safety technology vendors could erode SoundThinking's market share and cap margin expansion.

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 -9.7% 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 $17.3 million (and earnings per share of $1.44) by about August 2028, up from $-10.1 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 16.8x on those 2028 earnings, up from -16.1x today. This future PE is lower than the current PE for the US Software industry at 37.2x.
• Analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.54%, as per the Simply Wall St company report.

SoundThinking Future Earnings Per Share Growth

Risks

• SoundThinking's revenue growth remains dependent on the timing and renewal of large municipal contracts, as illustrated by service suspensions and contract delays in Puerto Rico, and the material loss of the Chicago contract, which creates ongoing revenue volatility and risk to recurring revenues.
  
• Heightened political scrutiny and growing public debate over the use of police surveillance technologies, evidenced by concerns about political changes in New York and prior contract loss in Chicago, expose the company to long-term secular risks from shifts in legislation or sentiment, which could pressure the company's addressable market and future sales.
  
• Rising operating expenses related to AI investments and maintenance are outpacing revenue gains, as shown by falling gross margins and net losses, raising concerns about the company's ability to scale profitably and improve future net margins.
  
• Despite product innovation, competitive threats such as Flock's Raven and undisclosed alternative technologies, coupled with the possibility that larger, diversified smart city or security companies enter the market, may erode SoundThinking's competitive edge and compress long-term earnings growth.
  
• Expansion into international markets and verticals such as critical infrastructure and health care introduce new operational, regulatory, and execution risks; slow adoption, unexpected legislative barriers, or inability to win major international or sector-specific deals could hamper revenue expansion and margin improvement.

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 $128.7 million, earnings will come to $17.3 million, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $12.76, the bearish analyst price target of $19.0 is 32.8% 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.