Digital Ally, maker and distributor of video surveillance for law enforcement, saw a spike in price action as the company revealed interest “increased dramatically” for its video systems. This has been caused by the civil unrest in Ferguson, Missouri. Digital Ally is maximizing the benefits of the shooting, which is receiving national coverage, as the company is up nearly 60% on the announcement. However, Digital Ally announced disappointing quarterly results last week. Investors seem to have forgotten the devalued fundamentals of the company due to this latest fluff press release.
Numbers Matter and They Don’t Favor Digital Ally
For the second quarter, Digital Ally had revenues of $3.4M, which represented a decrease of 32% YoY and a 12% decrease QoQ. The revenue shortfall was due to the absence of large orders as the company did not have a single order over $100k in the second quarter. A year ago, Digital Ally had 3 orders that were over $100k. Typically, large orders are generated with state police contracts, which is why the market got excited over the increased interest from Ferguson civil unrest.
However, even if Digital Ally is able to net a couple of larger orders, the company claimed that break even revenue is roughly around $4.5M/quarter. Therefore, Digital Ally would need to increase current revenues by 32% just to break even. Profitability is an issue that troubles Digital Ally. So far in 2014, the company has reported a net loss of 1.9M.
The Ferguson unrest has increased awareness for greater video surveillance around law enforcement, adding value to Digital Ally’s cause and business operations. However, increased inquiries do not necessarily mean sales and top line traction. Until Digital Ally is able to reveal some material growth in their business, the company will continue its decline. Investors should be wary of buying at levels above mid single digits.