The last five years have been a phenomenal time to be an investor in the S&P 500. Even after suffering through a tough stock market correction in 2022, the US’s flagship index has firmly outpaced its historical average returns of 10%.
After crunching the numbers and counting dividends, index investors have reaped a juicy 112.5% gain. On an annualised basis, that translates into 16.3%. And it’s enough to transform a £20,000 initial investment in September 2020 into £42,500 today!
Yet, for those who decided to pick individual stocks rather than rely on index funds, the gains could have been even more explosive.
Turning £20,000 into £179,000
There have been a lot of big S&P 500 winners in recent years, with a lot of attention being put on artificial intelligence (AI) stocks like Nvidia or Palantir. But another business that’s failed to make it into most headlines is Axon Enterprise (NASDAQ:AXON).
The firm’s mostly known for its non-lethal tasers and body cameras used by US law enforcement. But it’s also got a growing collection of cloud-based software packages, including solutions for digital evidence management being rapidly adopted. And in the last five years, adoption has expanded overseas with the group ramping up its international expansion efforts, including here in the UK.
The impact of these moves is pretty evident in its financials. Revenue’s gone from $681m to over $2bn, with net income going from barely breaking even to $382m. This explosive performance, paired with tremendous growth potential on the horizon, has translated into a staggering 795% total return for shareholders over the same period.
In other words, anyone who put £20,000 to work five years ago now has £179,000!
Still worth considering today?
Axon’s seeking to upgrade global public safety with both hardware and software solutions. It’s an ambitious goal but, so far, management seems to be taking the right steps. The group’s exciting financial momentum continues to be supported by innovation to further expand and protect its existing competitive moat.
However, while impressive, Axon still has its weak spots. The group’s heavy reliance on government and law enforcement contracts makes it susceptible to budget cuts or political shifts. It’s also exposed to execution risk as the firm seeks to rapidly expand its increasingly complex integrated software-as-a-service solutions.
It’s also important to recognise that Axon doesn’t operate within a vacuum. There are other emerging public safety tech companies like Cellebrite, emerging with their own unique solutions. These alternatives can directly or indirectly compete for law enforcement spending – potentially creating a headwind that limits growth even if Axon maintains a dominant industry position.
Yet, despite all these risks, this S&P 500 stock may still be worth considering. There remain large underpenetrated markets outside the US and the UK, with rising public safety budgets creating room for multiple winners, in my opinion.
Having said that, it’s essential to highlight the extremely rich valuations that companies in this space are trading at. Axon currently has a forward price-to-earnings ratio of 88.5, putting investor expectations exceptionally high. Therefore, the stock’s likely only suitable for investors with a strong stomach for volatility. And even then, averaging buying shares in smaller amounts over time could make the most sense in 2025 and beyond.
