Axon Stock: Flywheel Continues To Deliver Strong Results (NASDAQ:AXON)

Q4 Earnings Didn’t Disappoint

Axon Enterprise (NASDAQ:AXON), reported its Q4 results last week, and stock jumped 14% the day after. Axon’s Q4 revenue increased 29% YoY to $432 million, beating consensus by $11 million. The company also earned $1.12 per share, beating EPS consensus by $0.27.

The strong earnings were driven by the continued success of Axon’s flywheel strategy as it uses its network of integrated products and services to keep growing its revenue. Axon Cloud software was the primary growth driver with 44% YoY growth, whereas Taser 10 and Axon Body 4 cameras also contributed to the growth as demand for both products were strong.

We have been bullish on Axon since last year and initiated a buy rating in our November, 2023 article. In our previous article on February 5th, we reiterated our buy rating due to the 2 new product announcements which expanded Axon’s TAM significantly and increased its valuation (see below).

In this article, we will review Axon’s Q4 performance, analyze its revenue momentum, and reassess its valuation. Axon continues to be in a great position to capture the massive opportunity in the public and commercial safety markets. We remain bullish on its long-term prospects.

Segment Revenue Momentum Looks Strong

Axon’s revenue growth in Q4 was driven by its 3 business segments: the strong demand for its Taser 10 device, Axon Cloud services, and its camera business. We will review each of these segments in more detail below.

Axon’s cloud and services segment operates as a SaaS model and has a high margin and recurring revenue profile. The segment’s revenue grew 44% YoY to $164 million, representing 38% of its total revenue. The segment’s growth was driven by the broad adoption of its cloud software, which includes its digital evidence platform (Axon Evidence), its records management system (Axon Records), its computer-aided dispatch system (Axon Dispatch), and its real-time operations platform (Axon Respond).

Looking at the cloud segment’s 5-year revenue growth trajectory, we see a strong and accelerating growth momentum (see below). Despite the recent Q4 revenue growth deceleration to 44%, we anticipate the yearly upward growth trend to continue. The reason behind the strong momentum lies Axon’s business model and how it sells its products. The company keeps adding new devices to its ecosystem and offers them as cloud-connected bundles, which contributes to sustained cloud software growth. For example, its new offerings such as the Fusus command center, Sky-Hero drones, and the commercial body workforce cameras are all cloud-connected and expected to drive incremental revenue for Axon’s cloud segment.

One negative in the cloud segment was that it’s Q4 gross margin dropped from 76% to 75%, mainly due to the higher costs of Axon Fleet System installations. The company’s professional services organization has higher COGS and is part of the cloud and services segment, which impacts its gross margin. (The segment’s gross margin for software alone is above 80%)

Axon’s Taser segment, generated $161 million revenue, up 18% YoY. The main driver of the segment’s growth was the high demand for the Taser 10 device, which was released last year and has been ramping up since. When we look at the Taser yearly revenue trend, we see a deceleration in 2023 which we attribute to the ongoing ramp of Taser 10. As per the company shareholder letter, Taser 10 is still scaling up its production and the company is aiming to automate more of its production in the second half of 2024. This suggests that the demand for its Taser devices is strong and possibly constrained by its supply.

In terms of segment margins, Taser segment gross margin decreased from 63% to 57% YoY primarily due to Taser 7 production issues and warranty charges that occurred last year. Without this charge, Taser gross margins would have been higher as per the company earnings report.

Axon’s sensors and other segment, which includes its body and in-car cameras, generated $107 million revenue in Q4, up 25% YoY. The segment’s growth was driven by the high demand for the Axon Body 4 device, which was released last year. The segment’s revenue trend shows a deceleration in 2023 after a very strong 2022 (see below). We expect this segment to show strong momentum going forward as the demand for Axon Body4 device remains strong. Another growth catalyst for this segment is the new released Axon Body Workforce cameras for commercial frontline workers which expands its TAM significantly. Additionally, this segment will also benefit from the acquisition of Fusus, which allows body cameras to connect with command centers in real time.

Improving Margins and Healthy Balance Sheet

Axon’s Q4 results showed strong margins and cash flow, indicating its operational effectiveness. One negative item was that the company’s gross margin fell 10 basis points to 61%, because of lower Taser gross margins. The company’s net income margin rose to 14%, from 9% a year ago and its adjusted EBITDA margin also increased to 21% from 19% a year ago. The improvement in Axon’s operating margins was driven by several factors, such as the higher mix of software revenue, lower sales and marketing expenses, and higher operating leverage.

The company also has a very healthy balance sheet, with $1.2 billion in cash and $690 million of debt, resulting in a net cash position of $553 million, as of Q4 2023.

We believe that Axon’s margins and cash flow will continue to improve in the future, as it grows its software revenue mix, scales its product portfolio, and optimizes its cost structure. The company’s balance sheet indicates a strong financial position and has the necessary resources to fund its growth initiatives or acquisitions.

Valuation: 2025 Update

We have a long-term perspective on Axon and do not consider it a short-term trade. As Axon approaches our 2024 price target of $339 (as per our previous article), we want to update our valuation for 2025.

Axon currently has a market cap around $23 billion. Axon’s revenue is projected to be $1.93 billion in 2024 and $2.33 billion in 2025 (see below)

However, we think that Axon is conservative on its 2024 outlook and predict that it will surpass $2 billion revenue in 2024 (28% YoY) and achieve $2.5 billion in 2025 (25% YoY). Based on a forward P/S ratio of 12, this gives us a 2025 price target of $400, implying a 25% upside from the current levels.

Risks

Risks haven’t changed much since our last article:

• Regulatory and legal risk, Some of Axon’s products like Taser devices might face lawsuits, due to antitrust concerns. For example, some towns are suing Axon for antitrust violations and monopolistic practices.
• Competitive risk: Axon has different competitors in each of its product segments. The company doesn’t have any competition on its Taser devices, but Motorola Solutions is the main challenger for its body and fleet cameras.

Conclusion

In conclusion, we are still bullish on Axon, as we think that it is the leader technology company in the public safety space. The company has solid revenue momentum, is improving its margins and generating strong cash flow. We see significant long-term upside potential, as it keeps introducing new products and services, and expanding into new markets. Since the stock price has achieved our 2024 target, we have revised our company valuation for 2025.

We keep our buy rating for Axon and raise our 2025 price target to $400.