Evolv Technologies Had a Bad Week, Is it Time to Buy or Fade?

Key Points

• Evolv stock fell more than 30% on news that the company is the target of a class-action lawsuit. 
• The news made a bad earnings report look worse than it was. 
• The long-term viability of EVLV stock will depend on the suit's validity, which claims the company overstated its product's effectiveness.  

A bad week continues to get worse for Evolv Technologies Holdings Inc. NASDAQ: EVLV. The AI-based weapons detection company's stock was subject to a limit up, limit down (LULD) pause after dropping over 30% in early morning trading on May 10. The sell-off stemmed from a class-action lawsuit against the company that alleges securities fraud. 

For many investors, the company's earnings report may have been the first time they learned of the lawsuit. The primary allegation is that Evolv misrepresented the effectiveness of its products. The company was not at liberty to comment on the specifics of the suit other than to say the company is fully complying with the Federal Trade Commission (FTC) and the Federal Communications Commission (FCC) as they work through the regulatory process.  

Earnings Were Bad, but Not Horrible 

The company's first quarter earnings were a mixed bag. Revenue of $21.67 million fell short of analysts' estimates of $23.17 million. The company posted a loss of eight cents per share, which was better than the 14 cents per share forecasted by analysts.  

However, as has been the case with many technology stocks this earnings season, Evolv lowered its full-year revenue guidance to approximately $100 million from the previous $115 million. The company said the downward revision was due to uncertainty surrounding missed opportunities that may result from the pending lawsuit.  

However, the results were still significantly better compared to the prior year. Revenue was up 17%, and the company trimmed its per-share loss by 60%. The company still expects to be EBITDA positive by the middle of 2025.  

Plus, the company saw an increase in annual recurring revenue (ARR) of 96% year-over-year. And 49% of the company's booked ARR in the quarter came from existing customers. That was ahead of the 43% reported in Q1 of 2023. The growth in ARR is critical to the company's shift from being a product-based to a distribution/subscription-based company.  

Customers Are Renewing Their Subscriptions 

During the quarter, Evolv had its first meaningful set of renewals come up. The company reported a renewal rate of over 90% for its existing contracts. 

Investors will have to do their due diligence regarding the lawsuit's merits. And in the end, most investors will believe what they want to believe. But it's worth noting that clients, including hospitals, schools, and professional sports teams that have used the system continue to pay for it. It's unlikely that they would do that if the system were not working as expected.  

Stock Is Trading at 52-Week Lows 

There's no getting around the fact that this is an ugly chart for EVLV shareholders. The sell-off in EVLV stock has wiped out a year's worth of gains and pushed the stock to a level not seen since December 2022.  

With short interest on the rise in the last month, retail investors will have to work hard to push the stock higher. However, the stock did bounce up about 10% from its LULD low at around $2.08 per share. 

The best news for investors who are on the fence is you have time. The company is not expecting to be profitable until 2025. The lawsuit may take awhile to resolve, but investors will have a better idea of the overall merits or lack thereof in the next few quarters.