Why Axon Enterprise Shares Soared in August

Axon Enterprise (AXON -0.53%) has been a big winner on Wall Street over the past decade due to the company’s ability to consistently beat expectations. News of Axon’s latest results sent a spark through the markets, sending Axon shares up 21.7% in August, according to data from S&P Global Market Intelligence.

An amazing neighborhood

Axon provides hardware and software primarily to law enforcement agencies. The company traces its origins to the Taser stun gun, but in recent years has added a range of products, including body cameras and evidence management software, that it can sell to its stun gun customers.

It was a winning formula. In August, Axon reported quarterly revenue up 35% year over year, thanks to a 47% increase in cloud (or software) sales and a 28% increase in Taser revenue. The quarter marked a milestone for the company, as it was the first time that cloud revenue, at $195 million, practically matched the $197 million in hardware sales.

This is important for investors because cloud business is more profitable. The unit posted a gross margin of 72.4% for the quarter.

At the end of the quarter, Axon had $7.3 billion in future contracted revenue, up from $5.2 billion in the same period last year. This future business stock gives investors some clarity on future growth.

Is Axon stock a buy?

The company didn’t just beat expectations for the most recent quarter; it also raised its full-year outlook. Axon now expects to generate sales of $2 billion to $2.05 billion in 2024, up from $1.94 billion to $1.99 billion. Even at the low, the guidance is well above Wall Street’s consensus estimate of $1.98 billion. And at its midpoint, Axon would report 29.5% year-over-year growth.

All evidence suggests the momentum may continue. However, there are a few things investors should keep in mind before buying. First, Axon stock is expensive, trading at more than 70 times forward earnings. Wall Street has already priced in much of this future growth, and any small problem in the coming quarters could have an outsized impact on stocks.

Second, stock-based compensation rose from $32 million to $75 million in the quarter. The company is doing well and the employees deserve to be rewarded, but investors will want to keep a close eye on this number to make sure the spoils are shared with shareholders as well.

There’s a lot to like about the Axon. But given its valuation, new investors may want to consider dollar cost averaging instead of rushing out and buying a big stake at today’s prices.