Can Evolv Stock Recover From Its Massive Self-Inflicted Drop?

Key Points

• EVLV stock is down more than 40% after the company self-reported accounting irregularities impacting financial statements for its prior two years.  
• The company also received a negative report of its pilot program in select New York subway stations.
• Analysts were quick to downgrade the stock, but the options chain has been bullish for the last two months of the year.  

Shares of Evolv Technologies Inc. NASDAQ: EVLV are down approximately 45% after a group of independent board directors acknowledged accounting irregularities that would delay the company’s quarterly Form 10-Q filing.  

The issue concerns misconduct by some of the company’s employees regarding sales practices. Specifically, the company recognized premature or incorrect revenue regarding sales that were subject to extra-contractual terms and conditions. The misconduct will cause Evolv to restate financial statements made over the two years spanning Q2 2022 and Q2 2024.  

The company says the incorrect or premature revenue totals approximately $4 million to $6 million over the two-year period. To put that in perspective, in its fiscal year 2023, the company generated $80.42 million in revenue. And it’s on pace to beat that number in 2024.  

The Company May Have Bigger Concerns 

To be clear, accounting irregularities, even if done without intent, should be taken seriously.  What makes these charges more serious is that employees seem to have had knowledge of their fraudulent sales practices.  

The larger questions the investigation will have to determine are: What did the company know, and when did it know it? 

But that news comes on the heels of more bad news that Evolv received this month. The company was conducting a pilot program with the city of New York. The program placed Evolv Express systems in select subway stations. However, in over 3,000 searches, the system registered 118 false positives and failed to detect any firearms.  

This wouldn’t be the first time Evolv has faced scrutiny. Earlier this year, the company was cited in a class action lawsuit that raised questions about the effectiveness of its products and/or the veracity of its marketing claims. 

However, some of the controversies is due to the fact that Evolv doesn’t put its products through regulatory testing, which the company says fails to reflect real-world conditions appropriately.  

And the company cites an ever-increasing threat environment, poor visitor experience, costly security labor shortages, challenging worker retention, and a lack of security and visitor data as key reasons that the companies are looking for its products.  

The company is also showing growth in annual recurring revenue (ARR). In its most recent quarter, 49% of booked ARR was from existing customers. These are customers that have tested and deployed Evolv’s products and are now choosing to expand their contracts.  

Analyst Reaction Has Been Swift 

Obviously, the company’s upcoming earnings report, due out on November 14, will play a key role in how investors feel about EVLV stock. However, analysts wasted no time in weighing in on the Evolv news. 

The Evolv analyst forecasts on MarketBeat show four downgrades for EVLV stock. The most significant factor comes from TD Cowen, which downgraded the stock from a Strong Buy to a Strong Sell.  

Getting Involved With EVLV Stock  

If you have a short-term mindset, there are better options among technology stocks. Short interest is above 13%, and although it was down over 5% in the last month, short sellers may take an opportunity to put more pressure on the stock. However, as of midday trading on October 29, EVLV stock looks to be finding support around $2.40. That’s about 20% above the stock’s 52-week low.

That suggests the worst may be over. And a drop of over 40% on news that impacts a small fraction of the company's revenue seems like an overreaction. Buy-and-hold investors may see this as a buyable dip, but you may want to wait until after earnings to make that decision.  

The picture looks a little clearer for traders, particularly options traders. The options chain shows a highly bullish puts-to-call (PTC) ratio in November and December. That suggests bullish sentiment. However, that sentiment reverses in January 2025 to become bearish. There could be many reasons for that, including concerns about how the economy may impact capital expenditures for the company’s customers.