Axon: A Market-Beating Stock With A Mission And A Moat

Goal of This Article:

As always, I like to begin with the end in mind for my readers and share what is the purpose and goal of my article. Axon Enterprise (NASDAQ:AXON) is a hidden gem for most retail investors as they are unaware of this stock and what the company truly can offer its customers. I would like to shed some light on this stock and share why Axon has been a steady growing company, with a moat in public safety devices and software, and has provided market beating returns for its shareholders. This stock can help diversify any shareholder’s portfolio as it covers a unique space in public safety where there are not a lot of companies servicing these markets. In addition to the company’s unique original product offering of the taser gun, it has expanded since then by creating an entire ecosystem for law enforcement.

My goal for this article is to review the following questions and provide readers with enough information to help them decide if this is a stock, they further want to learn more about and if it is right for their portfolio.

• Why was Axon one of the most shorted stocks just a few years ago? And how has it changed and are the financials much better?
• What is Axon Enterprise’s mission, history of the company, and company culture?
• How has Axon transformed from the Taser company to being an ecosystem for public safety?
• What are the potential risks in investing in Axon Enterprise?
• What new target markets has Axon entered and what is the TAM penetration possibilities?

So, let’s begin.

The Company History and How it All Started

The initial event that fueled the creation of this company was when Rick Smith was at Harvard University and his two high school friends were shot dead. This event caused Rick to start thinking about alternatives to gun violence and researching non-lethal tools that could replace lethal weapons.

Axon Enterprise, Inc. is the company formerly known as Taser which was founded 29 years ago by brothers Rick and Tom Smith. In 1993 the brothers formed Air Taser Inc. creating a version of the taser gun that uses compressed nitrogen instead of gun powder as a propellant. In 2001, the company went public on the NASDAQ under the stock symbol TASR. The Taser company based out of Scottsdale, Arizona had its fair share of controversy with having an average of 14 annual lawsuits of wrongful death accusations during 2004-2009. The company won many of these lawsuits, and in 2008 the company began producing body cameras called the Axon Pro to provide increased transparency of officers and the communities they served. These body cameras uploaded video footage for online storage to their web-based service Evidence.com.

In 2013 the brother co-founder Tom Smith would leave the company to move to lead an aviation start-up company. This same year the Taser company started a division in Seattle named Axon which was created by CEO and co-founder Rick Smith as he was inspired by Microsoft’s use of the Xbox brand into the entertainment business. Axon would later become the platform for the entire product eco-system and the company would change its name to Axon Enterprise in 2017. This company went from becoming a one product device company with a niche audience to becoming a technology company that develops weapons, other hardware devices, and software into an ecosystem for military, law enforcement, and civilians.

Why is Axon Enterprise not one of the most shorted stocks anymore? How has it changed and are the financials improved?

Now that you know the history of the company, we can start addressing the questions I would like to answer for you. Axon Enterprise had a short percentage anywhere between 5% all the way up to 35% from 2014 to 2021. That is a long time for investors to be short on a company and a large amount of the float being short. There was a large group of investors short on the stock most likely due to the controversial lawsuits, lack of super high growth revenue at the time, and products being given to police departments for the first year for free which was criticized by some (turned out to be a brilliant land and expand strategy for future growth).

However, if you were a patient investor and continued to hold your position since 2014 you have now earned over 607% returns on your investment. Even if you just heard of this stock just six months ago and bought you would have almost nearly doubled your money in a time where the S&P 500 total return during this time was under 3%. So, what business results has the company produced that has caused the stock to nearly double in the last six months?

In Q3 2022 the company was able to deliver record quarterly revenue of $312 million, up 34% year over year. This level of revenue growth was great, and their software results were even higher, SaaS strength drove Axon Cloud revenue growth of 51% and their Annual Recurring Revenue of $403 million. The ARR was up 40% year-over-year and for the first time ever Axon delivered over $1 billion in revenue for their last twelve months trailing. The company has been producing steady growth and sequential gross margin improvement and has inherited leverage in their business model causing a net income of $12 million and adjusted EBITDA of $68 million, at 21.7% margin.

What Are the Risks in Investing in Axon?

With any investment in the stock market there is always going to be potential risks. Even if you are a bull on a stock one must examine the potential risks that could cause an investment to decline and not play out how you expected. Currently Axon stock has already doubled in a short six months and is overvalued based on analyst DCFs. Not to mention how Wall Street has performed this past year, crushing many tech stocks in the NASDAQ, and we are predicted by many to be entering a recession in 2023.

Axon is also not projected to have high earnings growth rates on average for the next two years but on a positive note Axon did become profitable this year. The revenue growth by analysts is predicted to be half of what Q3’s 34% revenue growth produced.

The final risk I could see with the stock would be what if founder and CEO Rick Smith walked away from the company and was content leaving the company in the great state that it is in. Would the company lose additional talent? Would the company lose its culture and direction? It is not every day a CEO and Founder has stayed at the helm for nearly 30 years. I personally do not see this risk happening as the company is at an inflection point in my opinion and Rick and team has had to endure many challenging years to get to this point, and exponential growth could be around the corner.

This doesn’t mean that Axon could not potentially give up a lot of their gains from these last six months in 2023, but that is what is possible when investing or trading during the short term. Life is unpredictable and so is the stock market, but now let me share with you why I am holding onto my position in Axon for the long term and plan on adding as time goes on.

The Mission and Moat

When I invest in stocks, I invest in companies that meet most of the following criteria:

• Mission Driven and Customer Obsessed
• Founder Led or Long-Standing CEO with “Skin in the Game”
• High Recurring Revenue with High Net Revenue Retention Rate
• Free Cash Flow Positive or Profitable
• Low to Zero Debt and High Cash on Hand
• Sells an Eco-system that Delivers Quantifiable Value & Solves Problems
• Has a Large TAM and Good Company Culture

In these next two sections of this article, I will share why I believe Axon Enterprise meets my investing criteria.

I love how simple and direct Axon’s mission statement is, “We Protect Life”. Axon wants to make the bullet obsolete, reduce social conflict, and enable a fair and effective justice system with capturing the truth via their body cam technology. This is a company I can get behind and know they are mission driven to make the world a better place. When you look at the quantifiable results, they have started to really deliver on their mission of protecting life, as they have saved 274,000 lives from death or serious injury, complaints are down 88% and the use of force is down 58% with the police officers using Axon body cams, and lastly guilty pleas are up 20% and officer court time was reduced by 70%. It is these kind of business outcomes for law enforcement that would drive renewals and expansion on Axon contracts.

We already know that Axon is a Founder led company by CEO Rick Smith who has been the leader of the company for more than 29 years and appears to be as passionate as day one on making the bullet obsolete since day one. CEO Rick Smith is financially aligned with shareholders by owning 3% of all shares of Axon and has compensation bonuses in place for certain market cap targets.

The AI software and cloud storage in evidence.com that Axon sells law enforcement helps keep officers spending more time in their communities opposed to being behind a desk filling out paperwork most of their time. The AI software can help fill out paperwork for officers based on the information it captures from the Axon body cams, giving back time to officers to be out in the field. Over 80% of the revenue that Axon generated last year was from their recurring bundles they sell that include the taser guns, software, drones, body cams, and online cloud storage. The net dollar retention was 120% with over $400M annual recurring software revenue and 75% gross margins on their cloud revenue. The CAGR on Axon’s different revenue streams with these bundles have all been growing double digits and the higher gross margin revenue software and cloud offerings are growing the fastest.

As I mentioned earlier Axon reached over $1 billion in revenue these last trailing twelve months, became profitable this year, and is generating free cash flow. All are great indications of growth and progress for the business, but it also has less risk than most companies during these economic times as Axon has zero funded debt on the books with over $375M in cash and short-term investments. Axon has been operating debt free for over five years which showcases how they have been able to grow organically while being fiscally responsible to the business. One could assume the tenured leadership team and board of directors that have been with the company for the last 12 years on average have had an impact on this.

Institutional Investors Believe in the Ecosystem and the TAM

I believe these results of growth and efficiency are what have institutions holding a record number of total shares at nearly 78%. This level of steady revenue and margin growth and stability in ownership has led the stock to having a sturdy Beta of only .56.

For me when I invest in a company it also matters what the company culture is and how employees feel about working at the company. Axon has won awards in 2018, 2019, and 2020 for being a great place to work and how they compensate their employees. On Glassdoor, the CEO Rick Smith has an 85% approval rate and the company is rated right under 4 stars overall. I dug into this further with watching Axon’s YouTube channel and their video series on what it is like to work at Axon called “The Ride”. I encourage all current and potential investors to check it out.

There really isn’t any strong competition in this marketplace against Axon Enterprise, especially when you compare their full eco-system, they can offer customers and the new markets they are entering. Previously, Axon did have competitors in their industry such as companies like Tasertron, Stinger Systems, and Karbon Arms but all of those eventually got acquired by Axon previously.

What Do Investors Have to Look Forward to?

Axon Enterprise has a complete ecosystem now that plays an entire role through a safety incident & is now being used in other market areas besides law enforcement. These long-term contracts that Axon gets customers to sign continue to improve in gross margins over the back half of the contracts, and they on average get customers to sign five-to-ten-year contracts with law enforcement. Axon currently has over $3.7 billion in total company future contract revenue or better known as “remaining performance obligations”. Axon plans on recognizing between 15-20% of this balance in the next 12 months. Axon raised guidance twice this year on growing EBITA, gross margins, free cash flow and total revenue.

Axon is a global company with an estimated TAM of $52B and is growing it markets such a Federal, Corrections, Fire & EMS, Justice, and Enterprise. This slide from their investor presentation this past Q3, says it all as there is a lot of future growth to be achieved.

I will leave my readers with what excites me most about the future of Axon Enterprise, and it is their “Moonshot Goal” for the company. This excerpt from their investor shareholder letter walks through what this is and how they are going to achieve this.

In October, Axon returned to the International Association of Chiefs of Police (IACP) annual conference, the largest law enforcement event of the year and a key customer-facing event for us. This year, we announced that Axon is joining forces with law enforcement and community leaders in a moonshot goal to cut gun-related deaths between police and the public in half by 2033. In announcing this moonshot goal, Axon pointed to the relevance of our R&D product roadmap of hardware devices and SaaS software solutions. We are committed to investing in the technology, training and data that will help achieve better outcomes and deepen trust between law enforcement and the communities they protect and serve. Our product roadmap includes accelerated advancements in non-lethal and de-escalation tools and training, next-generation cameras and evidence capture devices, real-time response and communications tools, community impact, engagement and feedback solutions, and more comprehensive and actionable use of force and response to resistance reporting.

This goal is definitely a moonshot but one that is meaningful and worth everything to achieve. I believe this truly demonstrates how mission driven Axon Enterprise is and how focused they are to getting there. This is an investment position I continue to hold and add to as it is making the world a better place. If this article was helpful in learning what Axon Enterprise does and the potential they have for the future, please share it with others and do your own research to see if it is the right investment for you.