Quarterhill + IRD / Rekor SystemsIt's quite something to watch as Rekor (REKR) lunges from one new high to the next. It was up at one point today almost 10% (to $23), which is about 100x sales per share. Total sales of less than $10 million and losing piles of money. Book value of less than $1 per share, though a recent share offering will have raised that somewhat. To top it off, there was a recent well-researched piece in Seeking Alpha that cast serious doubts on Rekor's operations and governance.
https://seekingalpha.com/article/4384024-rekor-systems-sum-of-parts-analysis-implies-58-downside-red-flags-on-corporate-governance
Market doesn't care. Up and up goes Rekor.
I think it's useful to reflect on what's going on. By any reasonable examination (I'd contend) based on assets, sales, or earnings, a share of Quarterhill should be worth more than a share of Rekor. And yet . . .
So what gives? I think there are two key things at play here.
(1) perception of growth
and, related to that,
(2) perception of product moonshot potential
Whatever you want to say about little Rekor, it is growing. Year-over-year Q4 sales rose from $1.5 million to $2.8 million. Operating loss rose from $2.2 million to $3.1 million but, again, the market doesn't seem to care.
By the way, I'm not trying to suggest that the market's valuing of REKR makes sense or, for that matter, that this is a path Quarterhill should be going down. I'm just trying to get a handle on what the market appears to be "thinking," if I can call it that.
So the first takeaway here is that the market seems to be focused, to the exclusion of pretty much everything else, on sales growth--and an expectation (through extrapolation that may or may not be justified) of more sales growth.
But it's useful also to look at Rekor's product offerings. They did a deal in November 2020 with Oklahoma wherein Rekor uses licence plate data to flag uninsured drivers. I think it was Rekor's first sale of this type and I suppose if they're able to get the same deal with all of the other 49 states then the stock runup might not look so crazy. Rightly or wrongly, the market seems to be buying into the idea of this as a kind of moonshot.
Rekor also has an interesting initiative that is currently being tested by Mastercard and (burger chain) White Castle. It's basically a tolling system for getting your fast food in the drive-through lane. Your licence plate is read and tied to your credit card (if you've signed up) and so you won't even have to pull out your wallet to pay for your coffee and donut. I think the idea may be that Rekor would get a small cut.
I'm not aware that there's any word back yet from Mastercard or White Castle but you can see how the market might be excited about something like that. Can you imaging if someone could set up something like that with Tim Horton's?
So there looks to be a kind of a moonshot dream in play with Rekor. And the market seems to be in a mood to have a lot of faith.
Is any of this relevant to Quarterhill? Well, it certainly highlights the need for ITS sales growth. Looking at the statements, one might be excused for thinking that IRD is going to have annual sales of $80 million in perpetuity. One takeaway that suggests itself is that Quarterhill might want to be willing to stretch itself a little further in the quest for quality sales growth.
Should IRD rush to get into these two businesses that Rekor is making so much noise about? Flagging uninsured drivers and tolling systems for the morning donut and coffee? I have no idea, though they don't sound to me all that far removed from what IRD is already doing.