Climate Disasters And Defense Demand Will Drive Powerful Long Term Upside Potential

Catalysts

About Genasys

Genasys provides integrated hardware and software solutions that power critical communications and early warning systems for public safety agencies worldwide.

What are the underlying business or industry changes driving this perspective?

• Acceleration of climate driven natural disasters and extreme weather is associated with structural demand for modern, targeted warning systems such as Genasys Protect and LRAD, including recurring software ARR as more jurisdictions modernize their public safety infrastructure.
• The fully funded, multi year $75 million Puerto Rico dam and early warning contract, with high hardware margins and associated software ARR, provides visibility on revenue and gross margin expansion as percentage of completion accounting reflects the underlying profitability.
• Renewed and expanding U.S. Army demand via the CROWS tech refresh program, with an initial $8 million to $8.5 million order and expectations of a larger run rate than prior $10 million to $15 million levels, supports a growing, higher margin defense revenue stream and earnings leverage.
• A rapidly growing software pipeline, particularly the increase in interest east of the Rockies and adoption of differentiated capabilities such as FloodMapp based flood prediction and precise zone based alerting, indicates potential for higher margin software bookings and long term ARR once delayed public safety funding normalizes.
• A record 12 month backlog above $60 million, which excludes incremental Puerto Rico ARR and future CROWS awards, combined with recent $2.5 million annualized cost reductions, provides a basis for potential operating margin changes as this backlog converts to revenue.

Assumptions

This narrative explores a more optimistic perspective on Genasys compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Genasys's revenue will grow by 107.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -92.2% today to 21.2% in 3 years time.
• The bullish analysts expect earnings to reach $57.9 million (and earnings per share of $1.29) by about December 2028, up from $-28.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $23.0 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 5.8x on those 2028 earnings, up from -3.8x today. This future PE is lower than the current PE for the US Communications industry at 33.1x.
• The bullish analysts expect the number of shares outstanding to grow by 0.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.52%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Prolonged or repeated disruptions to U.S. federal grant programs that fund public safety and hazard mitigation, such as the recent freeze and program cancellations impacting more than $2 billion annually, could structurally limit how much state and local agencies can spend on warning systems, constraining long term software and hardware revenue growth and delaying the path to positive earnings.
• Genasys growing dependence on a small number of large, project based contracts such as the $75 million Puerto Rico dam and early warning system introduces concentration and execution risk, where weather disruptions, permitting delays or implementation setbacks across the seven project groups could push out revenue recognition, keep gross margins below expectations and exacerbate net losses.
• Despite secular tailwinds from climate related disasters, recent funding driven slowdowns in software bookings and only modest 7 percent year over year software revenue growth highlight the risk that the expanding pipeline labeled pending funding does not fully convert, which would cap the build out of higher margin recurring ARR and weigh on long term operating margins and earnings quality.
• Reliance on defense and government programs such as CROWS for higher margin hardware growth exposes the company to shifting federal budget priorities, procurement cycles and potential program changes, any of which could reduce or delay anticipated volumes, dampening revenue visibility and limiting the expected expansion in gross profit and operating leverage.
• Persistent GAAP operating and net losses, coupled with limited cash and marketable securities of $5.5 million and ongoing cash burn from operations, create a structural need for external financing or deeper cost cuts. This could result in shareholder dilution, constrained growth investments and pressure on future earnings per share.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Genasys is $5.75, which represents up to two standard deviations above the consensus price target of $5.12. This valuation is based on what can be assumed as the expectations of Genasys's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $5.75, and the most bearish reporting a price target of just $4.5.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $273.3 million, earnings will come to $57.9 million, and it would be trading on a PE ratio of 5.8x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $2.36, the analyst price target of $5.75 is 59.0% 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.