Axon Enterprise: A Market Beating Inventory With A Mission And A Moat

Purpose of This Article:

As at all times, I like to start with the top in thoughts for my readers and share what’s the function and purpose of my article. Axon Enterprise (NASDAQ:AXON) is a hidden gem for many retail buyers as they’re unaware of this inventory and what the corporate really can supply its prospects. I want to shed some gentle on this inventory and share why Axon has been a gradual rising firm, with a moat in public security gadgets and software program, and has offered market beating returns for its shareholders. This inventory can assist diversify any shareholder’s portfolio because it covers a singular area in public security the place there usually are not numerous corporations servicing these markets. Along with the corporate’s distinctive authentic product providing of the taser gun, it has expanded since then by creating a whole ecosystem for legislation enforcement.

My purpose for this text is to evaluate the next questions and supply readers with sufficient data to assist them resolve if this can be a inventory, they additional wish to be taught extra about and whether it is proper for his or her portfolio.

• Why was Axon one of the shorted shares only a few years in the past? And the way has it modified and are the financials significantly better?
• What’s Axon Enterprise’s mission, historical past of the corporate, and firm tradition?
• How has Axon remodeled from the Taser firm to being an ecosystem for public security?
• What are the potential dangers in investing in Axon Enterprise?
• What new goal markets has Axon entered and what’s the TAM penetration potentialities?

So, let’s start.

The Firm Historical past and The way it All Began

The preliminary occasion that fueled the creation of this firm was when Rick Smith was at Harvard College and his two highschool pals had been shot useless. This occasion triggered Rick to begin fascinated by options to gun violence and researching non-lethal instruments that might substitute deadly weapons.

Axon Enterprise, Inc. is the corporate previously often known as Taser which was based 29 years in the past by brothers Rick and Tom Smith. In 1993 the brothers fashioned Air Taser Inc. making a model of the taser gun that makes use of compressed nitrogen as a substitute of gun powder as a propellant. In 2001, the corporate went public on the NASDAQ underneath the inventory image TASR. The Taser firm primarily based out of Scottsdale, Arizona had its fair proportion of controversy with having a median of 14 annual lawsuits of wrongful death accusations throughout 2004-2009. The corporate won many of these lawsuits, and in 2008 the corporate started producing physique cameras referred to as the Axon Professional to offer elevated transparency of officers and the communities they served. These physique cameras uploaded video footage for on-line storage to their web-based service Proof.com.

In 2013 the brother co-founder Tom Smith would depart the corporate to maneuver to steer an aviation start-up firm. This identical 12 months the Taser firm began a division in Seattle named Axon which was created by CEO and co-founder Rick Smith as he was impressed by Microsoft’s use of the Xbox model into the leisure enterprise. Axon would later develop into the platform for all the product eco-system and the corporate would change its title to Axon Enterprise in 2017. This firm went from turning into a one product system firm with a distinct segment viewers to turning into a expertise firm that develops weapons, different {hardware} gadgets, and software program into an ecosystem for navy, legislation enforcement, and civilians.

Why is Axon Enterprise not one of the shorted shares anymore? How has it modified and are the financials improved?

Now that you already know the historical past of the corporate, we are able to begin addressing the questions I want to reply for you. Axon Enterprise had a brief proportion anyplace between 5% all the way in which as much as 35% from 2014 to 2021. That’s a very long time for buyers to be quick on an organization and a considerable amount of the float being quick. There was a big group of buyers quick on the inventory probably as a result of controversial lawsuits, lack of tremendous excessive progress income on the time, and merchandise being given to police departments for the primary 12 months at no cost which was criticized by some (turned out to be a superb land and broaden technique for future progress).

Nevertheless, in case you had been a affected person investor and continued to carry your place since 2014 you may have now earned over 607% returns in your funding. Even in case you simply heard of this inventory simply six months in the past and purchased you’ll have virtually practically doubled your cash in a time the place the S&P 500 whole return throughout this time was underneath 3%. So, what enterprise outcomes has the corporate produced that has triggered the inventory to just about double within the final six months?

In Q3 2022 the corporate was in a position to ship file quarterly income of $312 million, up 34% 12 months over 12 months. This degree of income progress was nice, and their software program outcomes had been even larger, SaaS power drove Axon Cloud income progress of 51% and their Annual Recurring Income of $403 million. The ARR was up 40% year-over-year and for the primary time ever Axon delivered over $1 billion in income for his or her final twelve months trailing. The corporate has been producing regular progress and sequential gross margin enchancment and has inherited leverage of their enterprise mannequin inflicting a web earnings of $12 million and adjusted EBITDA of $68 million, at 21.7% margin.

What Are the Dangers in Investing in Axon?

With any funding within the inventory market there may be at all times going to be potential dangers. Even if you’re a bull on a inventory one should look at the potential dangers that might trigger an funding to say no and never play out the way you anticipated. Presently Axon inventory has already doubled in a brief six months and is overvalued primarily based on analyst DCFs. To not point out how Wall Avenue has carried out this previous 12 months, crushing many tech shares within the NASDAQ, and we’re predicted by many to be getting into a recession in 2023.

Axon can be not projected to have excessive earnings progress charges on common for the subsequent two years however on a optimistic be aware Axon did develop into worthwhile this 12 months. The income progress by analysts is predicted to be half of what Q3’s 34% income progress produced.

The ultimate danger I may see with the inventory could be what if founder and CEO Rick Smith walked away from the corporate and was content material leaving the corporate within the nice state that it’s in. Would the corporate lose extra expertise? Would the corporate lose its tradition and path? It isn’t each day a CEO and Founder has stayed on the helm for practically 30 years. I personally don’t see this danger taking place as the corporate is at an inflection level in my view and Rick and workforce has needed to endure many difficult years to get up to now, and exponential progress could possibly be across the nook.

This doesn’t imply that Axon couldn’t doubtlessly quit numerous their positive factors from these final six months in 2023, however that’s what is feasible when investing or buying and selling through the quick time period. Life is unpredictable and so is the inventory market, however now let me share with you why I’m holding onto my place in Axon for the long run and plan on including as time goes on.

The Mission and Moat

After I put money into shares, I put money into corporations that meet many of the following standards:

• Mission Pushed and Buyer Obsessed
• Founder Led or Lengthy-Standing CEO with “Pores and skin within the Recreation”
• Excessive Recurring Income with Excessive Web Income Retention Fee
• Free Money Stream Optimistic or Worthwhile
• Low to Zero Debt and Excessive Money on Hand
• Sells an Eco-system that Delivers Quantifiable Worth & Solves Issues
• Has a Massive TAM and Good Firm Tradition

In these subsequent two sections of this text, I’ll share why I consider Axon Enterprise meets my investing standards.

I really like how easy and direct Axon’s mission assertion is, “We Shield Life”. Axon desires to make the bullet out of date, cut back social battle, and allow a good and efficient justice system with capturing the reality by way of their physique cam expertise. This can be a firm I can get behind and know they’re mission pushed to make the world a greater place. While you take a look at the quantifiable outcomes, they’ve began to essentially ship on their mission of defending life, as they’ve saved 274,000 lives from demise or severe harm, complaints are down 88% and the usage of pressure is down 58% with the cops utilizing Axon physique cams, and lastly responsible pleas are up 20% and officer court docket time was decreased by 70%. It’s these form of enterprise outcomes for legislation enforcement that will drive renewals and growth on Axon contracts.

We already know that Axon is a Founder led firm by CEO Rick Smith who has been the chief of the corporate for greater than 29 years and seems to be as passionate as day one on making the bullet out of date 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 sure market cap targets.

The AI software program and cloud storage in proof.com that Axon sells legislation enforcement helps maintain officers spending extra time of their communities against being behind a desk filling out paperwork most of their time. The AI software program can assist fill out paperwork for officers primarily based on the knowledge it captures from the Axon physique cams, giving again time to officers to be out within the area. Over 80% of the income that Axon generated final 12 months was from their recurring bundles they promote that embody the taser weapons, software program, drones, physique cams, and on-line cloud storage. The web greenback retention was 120% with over $400M annual recurring software program income and 75% gross margins on their cloud income. The CAGR on Axon’s totally different income streams with these bundles have all been rising double digits and the upper gross margin income software program and cloud choices are rising the quickest.

As I discussed earlier Axon reached over $1 billion in income these final trailing twelve months, turned worthwhile this 12 months, and is producing free money movement. All are nice indications of progress and progress for the enterprise, but it surely additionally has much less danger than most corporations throughout these financial occasions as Axon has zero funded debt on the books with over $375M in money and short-term investments. Axon has been working debt free for over 5 years which showcases how they’ve been in a position to develop organically whereas being fiscally accountable to the enterprise. One may assume the tenured management workforce and board of administrators which have been with the corporate for the final 12 years on common have had an influence on this.

Institutional Traders Consider within the Ecosystem and the TAM

I consider these outcomes of progress and effectivity are what have establishments holding a file variety of whole shares at practically 78%. This degree of regular income and margin progress and stability in possession has led the inventory to having a sturdy Beta of solely .56.

For me after I put money into an organization it additionally issues what the corporate tradition is and the way workers really feel about working on the firm. Axon has received 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 charge and the corporate is rated proper underneath 4 stars total. I dug into this additional with watching Axon’s YouTube channel and their video sequence on what it’s prefer to work at Axon referred to as “The Ride”. I encourage all present and potential buyers to test it out.

There actually isn’t any sturdy competitors on this market towards Axon Enterprise, particularly once you evaluate their full eco-system, they’ll supply prospects and the brand new markets they’re getting into. Beforehand, Axon did have opponents of their business equivalent to corporations like Tasertron, Stinger Systems, and Karbon Arms but all of those eventually got acquired by Axon previously.

What Do Traders Need to Look Ahead to?

Axon Enterprise has a whole ecosystem now that performs a whole function by a security incident & is now being utilized in different market areas apart from legislation enforcement. These long-term contracts that Axon will get prospects to signal proceed to enhance in gross margins over the again half of the contracts, and so they on common get prospects to signal five-to-ten-year contracts with legislation enforcement. Axon presently 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 steadiness within the subsequent 12 months. Axon raised steerage twice this 12 months on rising EBITA, gross margins, free money movement and whole income.

Axon is a worldwide firm with an estimated TAM of $52B and is rising it markets such a Federal, Corrections, Fireplace & EMS, Justice, and Enterprise. This slide from their investor presentation this previous Q3, says all of it as there may be numerous future progress to be achieved.

I’ll depart my readers with what excites me most about the way forward for Axon Enterprise, and it’s their “Moonshot Goal” for the company. This excerpt from their investor shareholder letter walks by what that is and the way they’re going to obtain this.

In October, Axon returned to the Worldwide Affiliation of Chiefs of Police (IACP) annual convention, the most important legislation enforcement occasion of the 12 months and a key customer-facing occasion for us. This 12 months, we introduced that Axon is becoming a member of forces with legislation enforcement and neighborhood leaders in a moonshot purpose to chop gun-related deaths between police and the general public in half by 2033. In saying this moonshot purpose, Axon pointed to the relevance of our R&D product roadmap of {hardware} gadgets and SaaS software program options. We’re dedicated to investing within the expertise, coaching and information that may assist obtain higher outcomes and deepen belief between legislation enforcement and the communities they shield and serve. Our product roadmap consists of accelerated developments in non-lethal and de-escalation instruments and coaching, next-generation cameras and proof seize gadgets, real-time response and communications instruments, neighborhood influence, engagement and suggestions options, and extra complete and actionable use of pressure and response to resistance reporting.

This purpose is unquestionably a moonshot however one that’s significant and price all the pieces to attain. I consider this really demonstrates how mission pushed Axon Enterprise is and the way centered they’re to getting there. That is an funding place I proceed to carry and add to as it’s making the world a greater place. If this text was useful in studying what Axon Enterprise does and the potential they’ve for the long run, please share it with others and do your individual analysis to see if it’s the proper funding for you.