Stock Sonar #72 - 9/11/2024

Applied Digital (NAS:APLD) — mrkt cap $1.3B; Price $6.50; EV/EBITDA NA

STARTER POSITION INITIATED. Applied Digital is a company that has evolved significantly, transitioning from a bitcoin miner to an AI data center provider. Along the way, it has faced several short attacks, with critics questioning the validity of the company’s claims, accusing them of being inflated or even fraudulent. However, after conducting research and discussions with management, we believe the company’s newest data center buildout in Ellendale, North Dakota, is well-suited for AI workloads and will be in high demand. This is largely due to the significant power contracts they have secured and the strong fiber connections in place. AI data centers in the U.S. are currently limited, as the high-power loads required for these facilities make them scarce. Bringing additional power online will take utilities at least a couple of years, a considerable delay in an industry driven by the rapid pace of AI advancements. APLD has a letter of intent with a hyperscaler, and we expect a contract to be finalized by February 2025. Based on the value of their 400 MW buildout alone, we believe APLD has the potential to at least double from its current valuation.

Kits Eyecare (TSE:KITS) — mrkt cap $226mm; Price $7.3; EV/EBITDA 123

MORE RESEARCH NEEDED. KITS Eyecare operates in the underpenetrated online eyewear market, standing out with its vertically integrated model and in-house manufacturing. The space is more complex than it seems, requiring substantial capital for innovation. The company has seen rapid growth, with revenues increasing over 30% yoy, driven by custom eyewear and repeat customers. KITS’ competitors include Zenni and 1-800 Contacts, but they believe their custom, scalable approach gives them an edge. With capacity to handle up to $600 million in revenue before needing expansion, KITS is positioned well, but scaling this business at size remains challenging. More research is needed to assess their full potential.

SoundThinking (NAS:SSTI) — mrkt cap $164mm; Price $12.7; EV/EBITDA 27

PASS. The company, formerly known as ShotSpotter, built its reputation with acoustic technology that alerts police to gunfire locations in real-time. While effective and still underpenetrated in many areas, recent political controversy claims the technology leads to over-policing in predominantly Black neighborhoods. Roughly 50% of their territory growth comes from existing customers, but the large Chicago contract is at risk of non-renewal due to these tensions. The rebrand to SoundThinking in 2022 and the acquisition of new verticals suggest an effort to shift focus as gunshot detection now makes up only 65% of revenue. The uncertainty around whether this diversification strengthens or weakens their future prospects makes it a pass for now.