Shares of Axon Enterprise (NASDAQ: AXON) have been incredibly volatile in February. In fact, before today (26 February), this growth stock had lost 30% of its value in a single week. But today it’s up 15%!
What on earth’s going on here?
Overblown worry
This has been one of the best-performing stocks of the past two decades. Originally known for its Taser stun guns, Axon has built a powerful business centred around officer body-cams, a digital evidence management platform, and various software products.
This law enforcement ecosystem is very sticky and creates predictable and growing recurring revenue.
The reason the stock had been falling prior to today was due to its high valuation, with a couple of analysts downgrading it from Buy to Hold on valuation grounds. Currently, the stock trades at a lofty forward price-to-earnings (P/E) ratio of around 90.
One analyst also highlighted Axon’s cancellation of a partnership with Flock Safety. This company specialises in automated license plate recognition technology. Axon also makes dash cameras for police cars, so there was some technology integration between the two firms.
Axon says Flock made customers pay higher fees to use Axon’s technology, so it pulled out. However, new partnership terms have been proposed and the issue has been “somewhat overblown“, according to management.
Rock-solid quarter
The stock exploded upwards today because of the firm’s excellent Q4 results, released yesterday. Revenue jumped 34% year on year to $575m, representing the 12th consecutive quarter of growth above 25%. That was better than Wall Street’s expectation for $566m.
Particularly impressive was its Axon Cloud & Services segment, which grew 41% to $230m (40% of revenue).
Free cash flow generation was $225m in the quarter, though there was an operating loss of $16m due to increased stock-based compensation of $131m. The company does pay out a lot of bonuses in the form of shares, which is something worth noting.
Full-year revenue surged 33% to $2.1bn. That’s nearly double the amount it reported only two years ago, and it was the firm’s third consecutive year of growth above 30%. It achieved a record full-year net profit margin of 18.1%.
Massive TAM
Axon now has more than 1m users of its software solutions, spanning evidence management, real-time operations, productivity, and artificial intelligence (AI). And it booked over $5bn in business last year, with about half of that closing in Q4. This brings the total future contracted bookings to $10.1bn.
Management also increased the overall total addressable market (TAM) to $129bn. Now, it’s always best to take TAM projections with a grain of salt. But given that Axon’s revenue totalled $2.1bn last year, it’s clear the company looks set for many more years of strong growth.
Looking ahead to 2025, Axon expects revenue of $2.55bn-$2.65bn, approximately 25% growth, and adjusted EBITDA of $640m-$670m, representing roughly a 25% margin.
Firing on all cylinders
One risk worth noting is US government spending cuts, which could slow down contract wins in Axon’s federal business. While the firm thinks this is in fact a big opportunity (its software supports automation and boosts productivity), it’s still something worth watching.
Overall, the company is firing on all cylinders, and the market is rewarding that progress today. Despite the high valuation, I think the stock is worth considering for long-term growth investors.
