The Electro Optic Systems (ASX: EOS) share price is having a shocker of a month. Is it now a buy?

Here's what this analyst thinks of Electro Optic's stock…

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The Electro Optic Systems Holding Ltd (ASX: EOS) share price has tumbled 26% over the last 30 days. Does that make the stock a buy?

Motley Fool Australia analyst Andrew Legget spoke with our chief investment officer Scott Phillips earlier this month to discuss whether the tech company is ripe for investors' picking.

Interested readers can find their conversation in full here, on The Motley Fool Australia's YouTube channel. Don't forget, we post a new 'Stock of the Week' video every Wednesday.

Right now, the Electro Optic Systems share price is $2.51.

Here's a breakdown of what Legget thinks of Electro Optic Systems shares.

But first, what does Electro Optic Systems do?

Electro Optic Systems is a technology company working within the aerospace market.

Most of the company's revenue comes from its defence division where it produces remotely controlled weapon systems, ancillary products, fire control systems, and sensor units.

It also has a communication department creating terrestrial and space communications technologies.

The company is also developing SpaceLink – a satellite relay solution.

Electro Optic Systems is also working on other exciting up-and-coming technology within its areas of expertise.

The risks surrounding Electro Optic Systems shares

There are some downsides to Electro Optic Systems shares.

Firstly, as Legget notes, there will always be a level of obscurity surrounding its business. Perhaps understandably, many of its defence contracts include classified information and, therefore, investors must trust the company's management team.

Additionally, due to geopolitical tensions, Electro Optic Systems will likely be hemmed in to working with only a handful of countries.

Further, as Electro Optic Systems has aligned itself with the United States, Australia, Canada, the United Kingdom, and New Zealand, Legget says it will largely be at the whim of "the big dog in that fight" – the United States.

Together with that sentiment, a drop in governments' defence spending could prove dire for Electro Optic Systems' revenue streams.

Finally, the company's fulfilment of orders was delayed by COVID-19. Thus, a backlog of orders has been hindering its short-term performance. Legget commented:

I don't think [the backlog is] going to be a long-term issue but, again, it just shows when you're dealing with a concentrated customer base, when something goes wrong, even if it's not your fault, it's going to impact your results.

Is it a buy?

Still, Legget believes Electro Optic Systems shares will be market beaters in the long term.

He says he likes how the company found niches that allowed it a jump start on other companies working in the defence sector.

Electro Optic Systems has also built strong relationships with weapons manufacturers. As a result, it can make sure its products work with other industry offerings.

The company has also grown significantly over the past few years. Legget noted that in 2015, it was generating about $30 million in revenue. But, come 2020, it brought in $180 million.

Electro Optic Systems also currently has an order backlog worth around $397 million. Legget went further to say:

[Electro Optic Systems] do this thing where they risk weight all the potential opportunities based on their likelihood of winning the contract… that risk-weighted figure of potential pipeline in the future, that adds up to $3.1 billion at the moment. So, this is showing that there's a huge potential market out there which, if it can keep operating as it has, could mean that this company still has a lot of growth ahead of it…

[Electro Optic Systems] is, I think, one of the most innovative businesses on the ASX. It's operating in a market where there's a lot of high barriers to entry and it already has an entrenched place in that market. Now, it's also targeting some really exciting opportunities in the year ahead which, if it can continue executing like it has in the past, means that [the opportunities] should, hopefully, become very lucrative businesses in their own right, and if they do, then I think it's worth significantly more than what it's worth right now.

The opinions expressed in this article were as at November 2021 and may change over time.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and has recommended Electro Optic Systems Holdings Limited. The Motley Fool Australia owns shares of and has recommended Electro Optic Systems Holdings Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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