Why Axon Is Becoming One of My Biggest Holdings (NASDAQ:AXON)

Axon Enterprise, Inc. (NASDAQ: AXON) has slowly become one of my biggest holdings over the last few months. I haven’t covered the company until now because I wanted to really understand its hardware and software stack before jumping in to conclusions about whether it really lives up to the hype of its rising share price. In fact, the stock is up more than 80% in the past year.

But the more I learned about the company and what sets it apart, the harder it became to resist. I started buying stocks in early August and got lucky, picking up most of them before the big spike that followed. While I can attribute that timing to nothing but luck, I’m still very bullish on stocks and want to share why.

Basically like As I dug deeper into Axon, I was struck by its range of all-in-one products and how these products are part of a larger, integrated ecosystem that aims to transform public safety.

At first glance, you might think of Axon as an overrated “TASER company,” but that’s barely scratching the surface of what they’re building. The more we understood the synergy between Axon’s hardware, such as body cameras and TASER devices, and its growing cloud-based software platform, the clearer it became that AXON is on its way to becoming an indispensable partner for agencies law enforcement and public safety.

In particular, given the rapid adoption of Axon technology by these agencies, it is clear that we are headed for a future where Axon systems are so deeply integrated that the company will essentially drive and define the entire public safety ecosystem. So let’s take a closer look!

A complete ecosystem for public safety

So for starters, it’s important to understand that Axon’s approach to public safety is unique in that it’s designed around a complete ecosystem — from capturing evidence in the field to managing it in the cloud and even using AI to streamline administrative tasks . Their flagship software, Axon Evidence, is a key piece of this puzzle. It’s used by more than 20,000 agencies in 90 countries, handling massive amounts of data — 400 petabytes, to be exact. The platform allows law enforcement agencies to not only store digital evidence, but also share and analyze it in real time.

One of the latest additions to Axon’s software stack is Draft One, the company’s AI tool that automatically generates police reports based on body camera footage. It’s a game changer. This tool reduces the time officers spend on reports by over 50%, making law enforcement more efficient and freeing officers to focus on what matters most, being in the community and protecting the public.

Axon has shared numerous testimonials on YouTube with officers praising this product and you can tell they are genuine as report writing is undoubtedly one of the most tedious tasks for officers. Axon’s software dramatically speeds up the process, allowing them to complete reports much faster.

Income that sticks and grows

Now, take the entire Axon hardware and software suite—integrated products like TASER, Evidence.com, and Draft One, among others—and combine them into a unified, all-in-one ecosystem integrated into a recurring business model. That’s where the magic happens. Not only does it unlock a predictable revenue stream, but it also provides an unlimited runway for growth, as the company can continually add new products and features to this ecosystem, stacking additional revenue streams over time.

At the end of Q2 2024, the company boasted $850 million in annual recurring revenue (“ARR”), up 44% from the previous year. Even more impressive is their 122% net revenue retention rate, which means their existing customers not only stay, but spend more with Axon year after year, exactly as described.

As you can see in the chart below, the 44% year-over-year growth in Q2 shows no signs of slowing down. In fact, it even shows a slight acceleration from the five-year CAGR of 43%. Meanwhile, AXON is converting a progressively higher percentage of its revenue into ARR.

And Axon doesn’t just serve law enforcement agencies anymore. The company is rapidly expanding its customer base into new verticals, including corrections, federal agencies and even commercial enterprises. With its TAM estimated at $77 billion, the runway for growth looks wide open, especially internationally, where Axon’s revenue grew nearly 50% year-over-year in Q2.

There is no barrier to a slowdown in these growth rates as AXON continues to take small parts of total TAM across the globe.

In particular, the company’s software/cloud suite has barely scratched the surface of the US and Commonwealth, while Europe, LatAm and Asia remain completely untapped. In AXON’s most recent quarter, segment revenue was up 47%, and with that much evaporation, you can easily see why like-for-like rates are set to be sustained for a long time.

Now, you might be asking yourself, “Okay, Nikolaos, what makes you so confident?” To me, the reasoning is pretty simple. Axon operates what I see as a natural monopoly in the public safety space. Defense and public safety budgets are constantly growing in the US and around the world, and it’s hard to imagine a country that doesn’t want to maximize its public safety capabilities.

This demand is growing, particularly in Western countries, where heightened concerns about border security and illegal immigration are prompting governments to increase preparedness for potential unrest.

I don’t want to get political. I just think these are undeniable trends that will continue to shape the landscape of public safety solutions. Germany, for example, has just announced temporary border controls starting September 16, 2024, to manage irregular migration, crime and other security threats.

Axon is perfectly positioned to capitalize on this momentum by providing the cutting-edge technology needed to meet the evolving challenges of maintaining safety and order.

Why Axon’s growth story is just getting started

As I mentioned at the beginning of the article, what solidified Axon as one of my biggest positions is its long-term growth potential. While we’ve benefited from the recent run up in share price, I think Axon is still at the beginning of a much larger story, the narrative of which I hope I’ve already captured somewhat.

Whether it’s the growing demand for the TASER 10 – now with over 100,000 units in the field – or the accelerated adoption of Axon Cloud & Services, this company’s trajectory seems clear: up and to the right.

You might think my perspective sounds overconfident or like I’m imagining a dystopian, cyberpunk future. But let me be clear: this is the direction the world is headed. Look at Axon’s recent acquisition of Fusus, a leader in real-time crime center technology.

By integrating Fusus with Axon’s existing suite of products, they provide law enforcement with unprecedented situational awareness, including the use of drones for real-time monitoring. This isn’t science fiction – it’s happening in the field now, and it’s a look at how public safety is evolving with cutting-edge technology.

The problem of assessment

We could spend all day discussing Axon products and their exciting prospects. Many analysts here have already shared their views and it’s a conversation that could go on and on. I hope my thoughts so far have painted a clear picture of why I am bullish on the company.

But now, let’s focus on another critical aspect of Axon’s investment case: its valuation. While the growth narrative is impressive, it is equally important to understand how it translates into value for investors.

Given the forward P/E and P/S of 73.2 and 12.7, respectively, such a reaction is completely understandable.

But again, a closer look at AXON’s continued momentum, along with the monopolistic attributes of the business, can easily justify these valuation levels.

For context, AXON has grown its trailing-12-month revenue and EPS at a CAGR of over 32% and over 72% respectively over the past five years, with top-line and bottom-line growth even accelerating of late.

Clearly, at these growth rates, AXON can easily grow to multiples of both. Now, if you like the stock’s investment case but aren’t confident in buying at such high multiples, I feel for you because that’s exactly what I thought of the stock when I first came across it around 2017. In clearly, this kind of thinking caused me to miss the mega gains train between then and a few months ago.

As long as AXON continues to deliver and maintain its status as a one-stop shop for law enforcement agencies, I don’t think this trend will change. That’s especially true today, with AXON’s revenue re-accelerating on the back of its cloud division and AI-based solutions. So yes, the AXON is expensive, but this is one of those cases where I feel it’s worth paying for quality.