Can Axon Enterprise be a Winner over the Next Five Years?
Axon Enterprise (ticker: AAXN) manufactures and develops technology for law enforcement officers. Their original product was the TASER (the stun gun most police officers carry), but in recent years they have expanded to body cameras, sensors, and cloud-based record management systems.
Full disclosure, I’m a big fan of the stock and own shares personally. They announced earning late last week and raised their full-year guidance, causing the stock to pop 20%. Friday on Twitter I went through the quarterly report and summarized why I like the business:
$AAXN Summary of Axon Enterprise's third-quarter results: – $131 million in sales, up 25% YoY – gross margin of 61.3% – Axon Cloud up 42% w/ 75.8% gross margins Stock up over 20% today. Why? (cont.) — Brett Schafer (@CCM_Brett) November 8, 2019
Let’s go through some of the reasons why I like Axon’s business model and potential over the next five years.
Recurring Revenue Bundle
Recurring revenue (what analysts call subscriptions when they want to sound smart) typically deserves a high valuation because of the reliability of cash flows. Microsoft, Adobe, and Shopify all trade at a premium because investors know with reasonable certainty how much revenue they will be bringing in annually. The same goes for Netflix and Spotify on the consumer side.
Axon is trying to develop this for law enforcement technology. From the recent earnings letter:
“Customers have been rapidly adopting our best-value plans to gain access to more of the Axon network, building upon our historical strength with TASER device and body camera solution subscriptions. Our highest value tiered integrated bundle, for example, of $199 per officer per month over five years, known as the Officer Safety Plan, includes access to a wide range of benefits including TASER 7, Axon Body 3, and a host of cloud services including Axon Records.”
Say a department with 100 officers signs up to the Axon network. That’s over $1 million of high-margin, reliable revenue over the next five years. This subscription model also locks police departments into the Axon ecosystem. No other business can streamline the hardware and software products officers need, separating Axon from the competition.
A good executive team is crucial for a growth stock. Jeff Kunins, who was the head of Alexa Entertainment at Amazon, was just hired as Axon’s Chief Product Officer. On the conference call he sounded uber-excited to be heading up the company’s SaaS division:
“One of the most exciting things about Axon is our opportunity to create software devices, cloud services, SaaS subscriptions and mobile apps that all work together to create a flywheel effect of customer loyalty and long-term value, and that business model is incredibly compelling.”
Bringing the software-as-a-service model over to law enforcement will be a game-changer. I love seeing someone with experience at a tech giant leading the charge here.
Expanding Market and no Competition
Axon is the undisputed leader in law enforcement technology, with no competitors at their scale. Obviously, there are other companies selling hardware and software to police departments, but there is no one with the same breadth of products.
Recently, they have looked outside their traditional market (U.S. police forces) for growth. Federal law enforcement and international correctional officers could help the company sustain high sales growth for the next decade.
The stock isn’t crazy, but as with any growth company, you’re not getting fire-sale prices. As of November 9th, 2019, Axon had an EV/rev of 7.89 and an EV/EBIT of 87.
Total revenue grew 25% in Q3, driven by 42% growth from their high-margin cloud business. Right now, total gross margins for Axon are 61.3% and growing every year. If over the next five years they can boost gross margins to 70% and grow sales at a 25%+ clip, I have no doubt Axon can be a market outperformer.
As with any stock, there is a chance my thesis is wrong. TASER sales could start tanking, or police departments might go through a fundamental shift and start slashing their budgets. If that ends up being the case, Axon’s multiple would crater. However, I do not believe these are likely scenarios, which is why I plan on holding my shares for the next few years.
Disclosure: The author is not a financial advisor, and may have an interest in the companies discussed.