February 01, 2024 - 11:54am EST by
2024 2025
Price: 1.52 EPS 0.10 0.25
Shares Out. (in M): 21 P/E 15 6
Market Cap (in $M): 32 P/FCF 15 8
Net Debt (in $M): -28 EBIT 2 4
TEV (in $M): 4 TEV/EBIT 2.2 1.1

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AWRE, Inc.

Thesis:  Aware, Inc. (AWRE) is an undiscovered leading biometrics company that offers a suite of identity authentication software products that are expected to grow significantly as security threats, identity theft, and cyber-security needs continue to increase. In a reasonable bull case, I estimate the stock has near-term upside potential of 500-600%. The risk/reward seems particularly compelling because I project the company will be profitable in 2024, yet is only valued at an Enterprise Value/Sales (EV/S) of 0.2x, and a price to tangible net worth (P/TNW) of 0.92, with net cash of $1.30 per share, or 86% of the stock’s current price.

AWRE has undergone a significant transformation over the last several years, turning into a recurring revenue growth company. This transformation to a recurring revenue subscription service has obscured revenue and earnings growth. With this transformation near complete, the company is now on the verge of significant profitability, which I expect to cause investors and acquirers to start paying attention. The market has not yet recognized this transformation, which is why I find the investment case compelling. I believe the market will either revalue the shares much higher, or the company will be sold for a significant premium. I also view buying AWRE as a good terrorism/cyber-crime hedge investment, because If there are increased terrorist/cyber-crime attacks within the US and our allies, there would likely be a significant increase in demand for AWRE’s products.

Why Does This Opportunity Exist? 1) AWRE is a nano-cap illiquid stock with no active coverage; 2) Management has transformed AWRE into a growth recurring revenue software company, yet the market has not recognized this shift due to the company’s low visibility. AWRE just started to show meaningful fundamental progress during 3Q23 results, when they achieved profitability for the first time in years.

The Company: AWRE is a global biometric platform company that provides a suite of software that uses artificial intelligence to optimize identity and authenticate through biometric measurements. The company was founded in 1986, and its products are used in all three branches of the U.S. Government, within 150 law enforcement agencies, and serving twenty+ countries. AWRE’s growth strategy is to continue to grow within their traditional government and law enforcement end-markets, while expanding into additional commercial markets such as financial institutions. AWRE has had some success with this strategy and has added over twenty financial institutions as customers.

Many of AWRE’s products are proprietary as evidenced by their 80 US and foreign patents. AWRE had greater than 90% customer retention in 2022. In a recent independent benchmarking study, AWRE took the top spot in security for both impersonation and evasion detection in one attack type. The company also ranked top 5 in security and top 10 in convenience across most presentation attack types.

According to AWRE’s 10K, “Aware, Inc. is a leading, global authentication company that validates and secures identities using proven and trusted adaptive biometrics. Aware’s software offerings address the growing challenges that government and commercial enterprises face in knowing, authenticating and securing individuals through frictionless and highly secure user experiences. Aware’s algorithms are based on the most diverse data sets in the world and can be tailored to the unique security and requirements of each customer. Our portfolio enables government agencies and commercial entities to enroll, identify, authenticate and enable using biometrics, which comprise physiological characteristics, such as fingerprints, faces, irises and voices.”

AWRE’ products do the following “Enroll: Register biometric identities into an organization’s secure database; Identify: Utilize an organization’s secure database to accurately identify individuals using biometric data; Authenticate: Provide frictionless multi-factor, passwordless access to secured accounts and databases with biometric verification; Enable: Manage the lifecycle of secure identities through optimized biometric interchanges.

Our products span multiple biometric modalities, including fingerprint, face, iris and voice, and provide interoperable, standards-compliant, field-proven biometric functionality. Our products are used to capture, verify, format, compress and decompress biometric images as well as aggregate, analyze, process, match and transport those images and templates within biometric systems. For large deployments, we may provide project management and software engineering services. We sell our biometrics software products and services globally through a multifaceted distribution strategy using systems integrators, Original Equipment Manufacturers (“OEMs”), value added resellers (“VARs”), partners, and directly to end user customers.” 10K

Income Statement: In the last quarter AWRE reported its strongest results in recent history, with revenue of $6.4 mil representing 112% year-over-year growth, EPS of $0.05, and EBITDA of $0.4 mil. Results are likely to pull back from this level in 4Q, because of lumpy orders. The company is guiding to flat cash flow for 2023. It’s also worth noting that the company bought back 81,083 shares during 3Q at an average price of $1.52, which is the first time they have done so in years. It seems that all indicators are positive that growth should be in the 15-20%+ range for many years to come, which is in line with industry growth projections of 20%.

AWRE has done a very good job in growing recurring revenues by 83% since 2019, to approximately 60% of expected 2023 sales. Since AWRE has tremendous operating leverage like most software companies, with 92% operating margins, the company has the potential to generate significant EPS in the future as revenues grow. Assuming 15% annual revenue growth I project AWRE will report EBITDA and EPS of about $8 mil and $0.38 in 2026.

Cash Flow and Balance Sheet: AWRE has net cash on the balance sheet of $1.30 per share, and is expected to be cash flow neutral in FY23. I forecast the company will generate $2.5 mil if FCF in FY24, unless they scale up growth investments which would make sense.

Valuation: AWRE seems tremendously undervalued using virtually any valuation metric. Similar growth software companies in attractive end-markets tend to trade anywhere from 5-15x revenues, with many cyber-security companies trading as high as 25x sales. AWRE is currently valued at an EV/S of only 0.2x, and a P/TNW of just 0.92. At a 10x revenue multiple AWRE would be about $11. Another way to look at AWRE is on a P/E basis. If the company achieves my FY06 EPS estimate of $0.38 and we apply a 25x multiple plus net cash and discount that back two years, the stock would be worth $8.9 today. On an acquisition basis it’s anyone’s guess what price AWRE would be bought out for, but I believe it would be much higher. Insiders own 38% of AWRE, so they are well aligned with shareholders.

Catalysts: Continued revenue and earnings growth; Potential terrorist attacks and/or increased geopolitical risks; Potential acquisition of the company.

Risks: The primary risks for the company include competition, and industry growth.



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


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