2023-06-29 09:34:02 ET
Summary
- Bolstered by its unique ecosystem, Axon's software solutions, integrating with their hardware, yield a robust, scalable platform that distinguishes Axon in the market and deepens its competitive moat.
- Axon Enterprise has shown strong past performance and continues to innovate in the public safety industry, recently launching new products aimed at further reducing gun-related deaths.
- Axon's Q1 2023 performance showcases record-breaking revenue growth, a testament to the company's strong market expansion and rising product adoption rates, highlighting their sustainable business model and success.
- Our DCF model projects Axon's intrinsic share value at $201.14, aligning closely with the current share price, indicating that the stock is fairly valued, representing a stable investment opportunity.
Thesis
Axon Enterprise, Inc (AXON) has shown incredible past performance and established itself as a dominant figure in the public safety industry. The company launched a strong new suite of products to start the year and we see continuing innovation and vision driving the company forward over the coming decade. The ecosystem that the company is creating will generate enduring shareholder value going forward. The path ahead seems to be leading happily into the sunset, with the company still having a huge opportunity to further penetrate its total addressable market. Quality does come at a price however, and our DCF Model shows the shares to be fairly valued at this time.
Axon's Moonshot Mission: Reducing Gun-Related Deaths
Kick-starting 2023 with a bang, Axon has taken on an ambitious "moonshot" mission - to decrease the number of gun-related deaths between law enforcement and civilians by half in the next decade. To achieve this, Axon introduced two significant product innovations that could serve as the driving force behind this mission. We will dive into the new features of these products, demonstrating the continued innovation that Axon brings to the industry and how their software solutions tie in with their hardware solutions to create a truly industry leading sticky platform.
CEO Patrick Smith explained during the Q1 2023 Earnings Call :
We brought to market two major product releases that can serve as the workhorses to help get us there. When we talk about our moonshot goal to cut gun deaths, TASER 10 is our Saturn 5 rocket. And Axon Body 4 is mission control. Customer reception to TASER 10 has been great. We began shipping in March and many customers have called the product a true game changer.
TASER 10
What sets the TASER 10 apart from its predecessors is the capability to deploy up to ten individual probes without having to switch cartridges. Previous models could only deploy a single cartridge containing two probes and required manual reloading. Significant improvements in technology have allowed this product to employ only 1,000 volts, a stark reduction from the 50,000 volts employed by legacy TASERs. This reduced requirement allows the TASER 10 to utilize smaller wires and cartridges, resulting in improved projectile accuracy and an impressive effective range that stretches up to 45 feet, almost doubling the effective range over previous models . We deem these improvements alone over the TASER 7 alone to be very significant as the latest TASER 10 model now operates much more like a traditional firearm, but without the obvious long-lasting or deadly consequences.
The downside, and a vital point for law enforcement agencies to consider over previous versions, is the need for the probes to puncture the skin due to the inability of the decreased voltage to traverse clothing. The TASER 7, for example, employed dense probes to navigate through apparel. By contrast, in order to penetrate the skin, the TASER 10 has significantly increased its velocity to over 200 feet per second, which combined with the lightweight wire, not only augments precision but also bolsters the Neuromuscular Incapacitation ((NMI)) performance, a key metric for the effectiveness of tasers. These attributes, in our view, counter the downside and testing with law enforcement agencies has also shown the new taser to be an overall revolutionary improvement over predecessors. As such, we anticipate that these innovative developments will increase the device's appeal to law enforcement agencies.
We observe that new products such as the TASER 10 represent Axon's strategic and consistent focus on technological development, suggesting a progressive roadmap for future innovations. From an investor's perspective, the TASER 10 not only extends Axon's product portfolio but also solidifies its position as a pioneer in the field of law enforcement equipment.
Axon Body 4
The second new product release, Axon Body 4, aims to transform the way law enforcement works . We see the launch of their Axon Body 4 as an important step in their commitment to innovating in the first responder communication sector. The device offers enhanced two-way communication, permitting wearers to seamlessly connect with their teams during crucial situations. The 'Watch Me' feature is particularly noteworthy, as it allows immediate and remote assistance, thereby augmenting user safety and efficacy.
In practical terms, we deem the new features of the device as showing tremendous potential across a spectrum of scenarios. For example, law enforcement officers can now consult with mental health specialists in real-time, possibly improving outcomes in tense situations. Additionally, an officer requiring assistance can trigger live-streaming, ensuring rapid dispatch of reinforcements. Medical professionals can also gain from these enhancements; an EMT en route to the hospital can consult with medical directors, thereby potentially improving patient care. We also see positive implications for private security sectors, allowing for efficient interaction with command centers and facilitating speedy assistance when confronting threats or addressing unruly customers. Ultimately, these new use cases tie in well with our thesis that the company is continuing on its path of rapidly penetrating its total addressable market and growing the strength of its ecosystem through product synergies.
Unleashing the Power of Axon's Integrated Tech
When the new TASER and body cameras are coupled with Axon Respond, it unleashes the full potential of the company's real-time operational capabilities, addressing the decision-making challenges public safety professionals face today. We view the platform as being the fabric that weaves together the functions of its hardware products and creates an intelligent and sticky ecosystem in the process. Axon's partnership with Qualcomm Incorporated (QCOM), established in 2017, aided the development of this ecosystem . The platform offers a cutting-edge incident management solution that marries real-time situational awareness, provided by its hardware on the field, with a sophisticated communications framework. It captures field data in real-time, providing public safety agencies with an opportunity to respond quicker, bolster officer safety, and optimally deploy scarce resources.
In our view, the synergies between the ever expanding hardware and software solutions creates a powerful one-stop-shop that will only keep growing the size of the company's moat, as seen by the consistently high net revenue retention rate. We see Axon as creating a sticky ecosystem for public safety in the same way that Apple Inc. ( AAPL ) created an immersive computing and entertainment ecosystem for the consumer. The focus of this article is on the new product announcements from Axon, but the true breadth of their ecosystem is already significant:
We strongly recognize Axon's ecosystem to be a deep moat for the company. We want to take the occasion to point out how perfectly this one sentence statement underlines the company's value proposition to stakeholders. The CFO Brittany Bagley, stated during the Q1 2023 Earnings Call:
When our customers buy more of our hardware, they are also investing in our broader ecosystem of high-margin software offering.
Axon's Q1 2023: A Chapter of Robust Growth
Axon's Q1 performance shows a company on the rise. COO Josh Isner outlined four areas of focus for 2023, and the results thus far have been impressive. Let's take a closer look.
Revenue and Profitability: Smashing Records
The first area of focus, revenue growth, remains a top priority. This strategy is paying off, with the top line growing by 34% YoY in Q1 - a record quarterly revenue for the company. Axon's cloud business has grown by a staggering 51% YoY. Their Taser weapons business has also grown by 17% YoY, largely due to the strong demand for their TASER 7 platform. On the profitability front, Axon's second area of focus, the Q1 performance has been commendable. Despite some sequential headwinds in Q1, the company has delivered strong results. CFO Brittany Bagley announced during the Q1 2023 Earnings Call:
We continue to target full year adjusted EBITDA margins of 20%, implying a range of $288 million to $292 million.
Market Expansion and Product Adoption: Sky's the Limit
The third and fourth areas of focus - market expansion and product adoption - have shown promising results. International bookings have grown by double digits, with Europe leading the pack with nearly 100% YoY growth in bookings. Bookings in the justice segment, an emerging market for Axon, grew by triple digits.
As we can see, TAM penetration, especially in the cloud segment, is still at its early innings. Product adoption, especially of new technologies such as ALPR, air, and virtual reality, has seen double-digit bookings growth. Finally, the company has set its sight on an ambitious revenue growth rate of 22% for the year, up from 20% - a testament to its Q1 performance. As we wait for the next quarter results, Axon continues its journey to redefine public safety , and in our view the company appears well-positioned to deliver on its commitments.
Valuation
Our premise for Axon's future profitability is that the company will fall in line with the profitability of larger industry competitors. We will use Motorola Solutions, Inc ( MSI ) as a benchmark with their current 15% FCF margin. We believe that Axon will eventually exceed the current FCF margin of Motorola Solutions due to their software centric approach and the improved margins stemming from that strategy. Axon already has the gross margin advantage with a current TTM gross margin of ~ 61% Vs. ~ 49% for Motorola Solutions. Ultimately we view Axon as being able to obtain a ~ 20% FCF margin in the long-term, much like its peer Tyler Technologies , Inc ( TYL ) already has. Bear in mind, Tyler Technologies also currently shows a significantly lower TTM gross margin than Axon.
We therefore see a 20% FCF margin for Axon as fully reasonable in 10 years' time.
Axon posted ~ 26.3% revenue growth CAGR over the past 10 years. Going forward we see Axon achieving 60% of that CAGR as the company still has a large TAM but the law of large numbers starts to come into play, leading to an average of ~ 15.8 % revenue growth CAGR over the next 10 years. We also take into consideration analyst projections in determining this figure.
We present our DCF Model for Axon:
We use both perpetual growth and exit multiple calculations, taking the average of both calculations, to determine the terminal value.
Our DCF Model shows that Axon has an intrinsic value per share of $201.14. Based on our DCF Model, the shares are fairly valued with only 3.6% of implied upside, using the share price of $194.15 at the time of writing.
Risks
Axon faces risks from numerous sources. We will rank the risks in order of what we deem to be the largest to lowest risks:
Competitive Risk:
Axon faces competition from several other companies in the public safety technology sector. If these competitors introduce new, innovative products or can offer similar products at a lower cost, it could negatively impact Axon's market share and profitability.
Notable competitors include:
-
Motorola Solutions, Inc: Motorola is one of Axon's most significant competitors, as they also specialize in communications equipment for law enforcement and other public safety officials. They offer two-way radios, body cameras, and command center software, among other products.
-
Digital Ally, Inc (DGLY): Digital Ally is another company that provides video recording equipment and analytic software for law enforcement and security applications. Their product line includes in-car video systems, body-worn cameras, and automatic recording technology.
-
WatchGuard Video: WatchGuard Video provides law enforcement agencies with in-car video systems, body cameras, evidence management software, and more.
-
L3Harris Technologies, Inc (LHX): This company provides a wide array of technologies for defense, aviation, and law enforcement. Their product line includes body-worn cameras, in-car video systems, and a cloud-based digital evidence management system.
-
Reveal Media: Reveal Media is a global provider of body-worn camera and video management solutions for police and security sectors.
Dependence on Government Contracts:
A significant portion of Axon's revenue comes from contracts with government agencies, particularly law enforcement. Changes in government budget priorities, or political shifts leading to defunding initiatives, could result in reduced demand for Axon's products.
Regulatory Risk:
As Axon operates in the law enforcement sector, changes in regulations around law enforcement practices and equipment could impact the demand for Axon's products. For instance, regulatory changes limiting the use of force or the use of body cameras could affect the company's sales.
Technological Risk:
Axon's success depends on its ability to stay at the forefront of technological innovation in public safety. If the company fails to innovate or keep up with technological advances, it could lose market share to competitors.
Economic Conditions:
In periods of economic downturn, government budgets tend to tighten, which could lead to reduced demand for Axon's products.
Cybersecurity Risk:
Axon's digital evidence management system stores a large amount of sensitive data. A significant cybersecurity breach could result in lost or stolen data, harm Axon's reputation, and lead to financial liability.
Product Liability:
Axon's products, including its TASER line, are intended for use in high-stress, potentially dangerous situations. If these products malfunction or are misused, the company could face legal liability, negative publicity, and increased regulatory scrutiny.
Reputation Risk:
The use of Axon's products, especially its TASER line, can be controversial and receive negative attention in the media. If the public perception of Axon's products turns largely negative, it could impact the demand for their products.
Conclusion
In wrapping up our analysis of Axon, it's evident that this company has carved out an impressive niche in the public safety sector. Its track record is undeniably solid, displaying not just financial robustness but a commitment to innovation that places it a cut above the rest. Kicking off this year with a compelling array of new products, Axon hasn't been content to rest on its laurels and shows no sign of slowing down in the foreseeable future. The horizon for Axon looks bright, with an expansive and still largely untapped addressable market. This, combined with the company's indomitable spirit of invention, paves the way for a potential decade of sustained growth and market leadership. We view the most determining factor in creating current and future shareholder value to be the company's growing ecosystem, with new versions of products creating ever greater synergies.
Nevertheless, it would be prudent to tread with care. Quality indeed comes with a price tag, and as our detailed Discounted Cash Flow ((DCF)) analysis suggests, Axon's shares appear to be trading at a fair value at present. In other words, while the company's prospects and performance are shining, its stock may not be undervalued, offering less of a bargain for new investors. Axon is an industry titan with a bright future, but as attractive as its performance and prospects may be, the investment decision should be made with a keen eye on its current valuation. Investors who have not yet initiated a position, could benefit from waiting for a slightly better entry point. As such, we are assigning a hold rating to the stock.
For further details see:
Axon: Outstanding Compounder With Vision For The Long Term