A small-cap stock called Evolv Technologies Holdings (EVLV -16.77%) has vaulted to the top of my watch list. This is a company in the security industry, but unlike companies like Okta or Zscaler, it's not interested in providing security for data. It's focused on security for human beings in the real world.
Specifically, Evolv has a new kind of metal detector. The company's "smart" machine, the Evolv Express, relies on artificial intelligence to determine if the metal passing through the machine is actually a gun or not. This dramatically improves the possibilities for metal detection in large venues.
Here's why I'm buying shares of Evolv in September.
Solving the pain points of metal detection
Metal detectors have been around for decades in courthouses, jails, and airports. Of course, while the goal of metal detectors is to prevent people from smuggling in weapons or other hazardous items, the technology can often mistake innocent items for contraband.
The problem, of course, is that the traditional metal detector is a "dumb" machine. All it knows is that metal is trying to enter the building. The more sensitive a metal detector is to metals, the more likely it is to go off when innocent people try to pass through the machine. Your ordinary metal detector can't distinguish between an Uzi and an underwire bra or aluminum wrapper. Some people with metal implants set off metal detectors, too.
All these false alarms slow down the public, and long lines begin to form. And that's how a security checkpoint becomes an irritant.
Simultaneously, ever since 9/11, more and more people are worried about security in all sorts of public venues. A lot of places like hospitals, schools, and amusement parks are now thinking about security issues. I was surprised to discover that Walt Disney opted to manually check all the bags of visitors to its theme parks after the terrorist attack. This sort of invasive searching went on for years.
Evolv is a new solution to the problem
Evolv offers a "smart" metal detector that uses artificial intelligence (AI) to distinguish between guns and other forms of metal. The upshot is that guests can simply walk through the machine at normal speed. That makes Evolv Express 10 times faster than existing metal detectors, according to the company. Evolv estimates that 300 people go through a traditional metal detector in an hour. With its Express machine, it says that 3,600 people could pass through in an hour. The company says that over 350 million people have already been screened via its machines.
Earlier this year, the Department of Homeland Security (DHS) announced that the Express machine is Qualified as Anti-Terrorism Technology (QATT). Evolv Express is the only high-throughput weapons detection screening system to achieve SAFETY Act Designation. This federal award validates that the company's AI detection works and that companies are not sacrificing safety when they adopt this solution.
How big would the market be for that sort of machine? Evolv estimates that it's a $20 billion market opportunity. And, yes, the company has already won Disney as a client.
It's a security platform
What's particularly exciting about Evolv to me is its software-as-a-service (SaaS) model. Customers subscribe to a data solution, and Evolv provides them with data analytics and other services as people walk through the machines. You can track visitor arrival curves and guest counts, as well as alarm statistics and threat assessments.
I love subscription businesses because they are sticky. Once Disney signs on as a client, and pays for the machine, then Evolv has a continuous revenue stream from that one customer. And the company can use its machine potentially as a base to sell additional products and services.
Right now, the company's focus is on weapons detection, a $20 billion market opportunity. But once Evolv has established a platform in crowd safety, the company can start providing additional services. Today its machine is a metal detector; tomorrow it might also be a health screener. In the future, the Express machine might take a person's temperature remotely, and warn security when somebody entering a venue is running a high fever.
Evolv is seeing dramatic growth right now. In the second quarter of this year, the company reported that it had 1,147 subscribers, up 193% from a year ago. That includes governments, companies, schools, museums, and others. And revenue was up 94%. Right now, Mr. Market is extremely skittish on high-growth names, and the stock is down 77% from its first day of trading. So the valuation has gotten dramatically cheaper, with the price-to-sales ratio dropping from 70 a year ago to around 10 today.
Of course, the company is still tiny with just $9 million in revenue in Q2. So there are definite risks here -- but also a huge opportunity. The sales numbers are spiking nicely. In Charlotte, my hometown, the Carolina Panthers are now a customer, as is the Charlotte-Mecklenburg school system. These recent wins have convinced me that this growth story is for real. I'm opening up a small position in the next week or two.