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Axon (AXON) Stock | NASDAQ: AXON

Covered by Stratosphere

Accelerating Justice

Axon Enterprise ("Axon") is the inventor and manufacturer of TASER devices and various integrated hardware and cloud-based software solutions. TASER devices are the most well-known and prominently used less-than-lethal force devices by law enforcement bodies. Axon also manufactures its own branded body cameras, in-car systems, and some other devices that integrate with Axon's digital evidence management, productivity, and real-time operations software solutions.

Axon primarily targets US law enforcement agencies. Of the roughly 18,000 agencies present in the US, Axon has a relationship with about 17,000 of these agencies. The company is increasingly targeting other government bodies, such as the military, department of corrections, fire and emergency medical services markets, and regions beyond the US.

Stratosphere Score

8

Growth

9

Valuation

4

Quality

7

Margins

5

Dividend

0

Balance Sheet

10
Adrian Iwanicki

Author

Adrian Iwanicki

Equity Analyst

Investment Thesis

  1. Axon is well-known because of the TASER line of devices the company manufactures. Law enforcement agencies around the world (but primarily in the US) have been using these less-than-lethal devices for decades since they were brought to market in the 1990s. The TASER still remains the top stun gun on the market today as evidenced by its wide use among consumers and law enforcement agencies across the US.

  2. The company has shifted away from solely being a manufacturer to what is now mainly a software-as-a-service ("SaaS") company. Axon now has steadier and more predictable revenue streams that can be used by the company to self-finance its growth plans.

  3. The company seeks to "accelerate justice". With this, the company plans to continue expanding its cloud-based, hardware-software ecosystem around the US and beyond. Management sees a $52 billion opportunity globally that can be tapped in to as long as the company continues expanding on its software solutions and aggressively markets outside the US.

  4. We view Axon's main risks to be valuation, lack of insight into future profitability due to lack of robust profitability in the past, and social and political risks.

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

Competitive Advantages

Hardware & Software Integration

Axon, prior to 2017 (when the company was still called TASER), was mainly known for the sales of its flagship product, the TASER electroshock weapon used by law enforcement. In 2017, the company changed its name to "Axon" to reflect the pivot it had undergone over the last decade.

While the sale of TASER products today still make up roughly half of Axon's sales, the sales mix has shifted tremendously from being almost 100% of sales in 2012 to the 50 / 50 mix it is today.

Axon is now a noticeably different company, boasting an ecosystem of hardware and software solutions to which customers can connect to view and manage evidence, tap into artificial intelligence ("AI") capabilities, and "capture truth" as Axon calls it.

In the era prior to 2010, Axon provided the TASER products in an effort to "protect lives". Since then, the company has taken a more holistic approach to providing law enforcement with the products and services they need to not only protect life, but also protect justice by "capturing the truth" and "accelerating justice". This has been achieved through the introduction of Evidence.com (the Axon-owned cloud-based system that stores law enforcement data and also provides data management solutions) and Axon's body-worn cameras and Fleet in-car cameras, as well as Axon Cloud, dispatch services, and others.

Unlike its competitors, Axon is able to seamlessly integrate its high-quality body and in-car cameras with its cloud service. This integration helps save agencies tons of administrative work while also ensuring that all evidence is captured and stored in a secure and safe cloud-based platform.

The ecosystem is so well integrated that law enforcement agents need not think about turning anything on in the "heat of the moment" to ensure evidence is captured. For instance, Axon's body cameras can automatically begin recording when a police car's sirens turn on or when a TASER device is deployed.

This integration has helped Axon achieve high market penetration in the US where its primary operations reside. Axon reportedly provides hardware and software solutions to law enforcement agencies in 85% of US major cities. The company also has customer relationships with over 90% of the country's law enforcement bodies is well. We believe this is likely the case because of Axon's superb hardware-software integration and first-mover advantage in the less-than-lethal weapon category that established its strong brand name throughout North America.

The TASER is Unmatched

While there are a plethora of stun guns on the market, the TASER differentiates itself from all of its competitors because of two unmatched capabilities — range and incapacitation.

Generally speaking, stun guns project at a shorter range while TASERs can be shot at a further distance than their counterparts. Additionally, TASERs incapacitate the target, which can lead to more effective conflict de-escalation between law enforcement or a citizen and the target.

Axon's first-mover advantage with this style of stun gun helped it achieve near-monopoly status of the high-calibre stun gun market. There are many competitors with genuinely good products that law enforcement agencies use, but the TASER wins when it comes to long range and safety for the person wielding the device (shooting from a longer range prevents potential harm from possible close-range contact).

As a result of this first-mover advantage and high-quality product that has been around for decades, Axon now enjoys high market share, particularly in the US.

Recurring Revenue Model

Axon's pivot to providing software-as-a-service ("SaaS") solutions on top of a high-quality product portfolio make the company today look like far more of a SaaS company as opposed to a hardware manufacturer.

Since the introduction of its software solutions and cloud-based Evidence.com platform, Axon's growth has been mostly driven by the strong uptake of the software and sensors product portfolio. Between the end of 2016 and the end of 2021, TASER's compounded annual revenue growth rate was in the mid-teens while software and sensors grew at nearly 50% per year.

With this sort of model, Axon is likely now a more durable company for the foreseeable future. Axon's recipe — a strong hardware foundation coupled with a recurring-revenue subscription model — creates more predictable revenue streams, a clear research & development roadmap given the consistency of revenues, and the ability to outpace its competition.

Because Axon's competitors do not boast a robust, comprehensive hardware-software portfolio as Axon does, they may quickly fall behind as Axon's recurring cash flows ramp up. Axon has a financing edge here in the sense that it appears likely Axon can sufficiently self-finance (caveat: share-based compensation is growing and common stock issuances have been done in the recent past) its growth opportunities while Axon's competitors would seek external investor financing, slowing down the product and software investment process.

Opportunities Ahead

  • If it ain't broke, don't fix it — Axon's shift to SaaS / cloud solutions on top of its powerful hardware products can continue driving growth for years to come. Social justice and an ever-evolving status quo when it comes to law enforcement will continue to shape the tools and resources agents and officers use to de-escalate conflict. The last decade at Axon was defined by Axon's ability to expand beyond the TASER — adding another layer (i.e., "capture truth" as defined by Axon) to the self-protection foundation in order to drive non-lethal conflict de-escalation and resolution. Going forward, Axon seeks to continue "accelerating justice". While this may sound abstract on the surface, this may have profoundly positive effects on society and will likely come along with new products that help law enforcement de-escalate situations non-lethally and in line with whatever the current status quo in the future will be. For Axon, this means expanding on the "Smart Devices + Workflow + Intelligence" portfolio it boasts today (i.e., cameras, cloud via Evidence.com, Axon Cloud, dispatch, and TASERs) by harnessing the data from Axon's wide customer base. Over time, using machine learning and artificial intelligence, Axon will be able to build more powerful hardware and software to meet the current needs of law enforcement agents and officers. By constantly staying on top of the trends (i.e., listening to challenges law enforcement faces while bearing in mind what is socially just and acceptable), Axon will be able to deliver great products and software while keeping people safe.

  • Axon has ample opportunity to expand in regions outside the US. Today, Axon operates primarily in the US while also primarily catering to the needs of US law enforcement. The success of the TASER and other products and software solutions in the US has resulted in some interest abroad. The integration present between the company's hardware and software offerings make it a near indispensable product suite for agencies beyond the US. The company's focus on marketing itself around the world should be a positive growth lever going forward.

  • Axon sees a large and expanding total addressable market ("TAM") in which it can be a key player that makes a positive difference on law enforcement around the world. Most recently, Axon identified a TAM north of $50 billion, magnitudes above the revenue the company generates today. We do not believe Axon will be able to capture the entire market due to its US-centric focus, regional differences, and decent competitors present in the market. However, Axon should grow into a sizable chunk of this TAM if it continues to expand on its product portfolio by offering more advanced, cloud-connected products that genuinely help law enforcement de-escalate situations while keeping people safe. Augmented and virtual reality, consumer safety, Axon Air, productivity solutions, real-time operations (i.e., tracking, visibility, GPS, etc.) solutions, digital evidence, and devices are the main product categories Axon can work on to add value to law enforcement. Over time, Axon believes it can "obsolete the bullet", eliminate paperwork, transform communications through cloud, and re-work the approach to public safety. These are ambitious targets and Axon may have the recipe to make this happen.

Risks

Profitability

Axon has not yet been able to achieve a steady state of flush profitability both in terms of net income and free cash flow (when backing out the positive impact of stock-based compensation).

The company's growth ambitions mean Axon is still spending liberally on sales & marketing and research & development to meet those goals.

At this stage it is not fully clear exactly how profitable the business is, or what the "mature" economics of the business are. If the true economics of the consolidated business could not be determined, it is possible there is fundamental and valuation risk in the company that investors should monitor.

We think these risks are real and ones that will be monitored. However, we think Axon's product ecosystem is unmatched and its recurring revenue model should open up opportunities for high-margin cash flows in the future.

Current Events

Axon is navigating a field that is under much scrutiny today for malpractice and ineffective conflict de-escalation. The rise of such scrutiny means Axon must deliver socially responsible solutions that not only benefit the law enforcement agents or citizens they serve, but also de-escalate situations in line with the current status quo.

Axon's execution to deliver products that genuinely support improving public safety for everyone is at the utmost importance. Again, we believe Axon's product suite is built to navigate such an environment, but we cannot discount the risks inherent in this market.

An example of such a concern would be the lethality of TASERs. TASERs are marketed accordingly (i.e., "less-than-lethal" as opposed to "non-lethal"), but if the company is looking to "obsolete the bullet", it is possible that the TASER would not be a viable alternative to firearms unless it becomes more powerful. This would likely not be socially or politically popular even though firearms would likely still be more lethal. The presence of such competing interests could mean Axon may eventually "hit a wall" with these advancements, stopping the growth story short.

Investor Risks

As previously mentioned, the lack of profitability and its history make it difficult for the current investor to determine where steady-state margins for such a business would be.

That is, there is some speculation inherent in investing in Axon stock today. Without a clear view as to where margins may or may not be in 5 or 10 years time, investors are "flying blind" to some extent.

Additionally, Axon has seen its share count rise drastically over the last ten years. The company also issued new stock several times over the last few years to help it fund its growth plans. Current shareholders have been diluted consistently, and as it stands, there appears to be no plan to buy back any shares.

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