What we think about Axon Enterprise (AXON)
AXON Enterprise in Three Words: Public Safety & Enforcement
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Background
AXON Enterprise is a leader in public safety and law enforcement technology with strong growth and innovative expansion. Known for its TASERs and body cameras, AXON has broadened its market presence with the launch of the advanced TASER 10 and Body 4 camera, and is in the process of expanding its addressable market by rolling out a range of body cameras to retail workers in several major chains. According to the National Retail Federation in September 2023, 35% of respondents were researching body-worn cameras for retail employees, with 11% already in a pilot testing mode.
In its most recent quarter, AXON’s total quarterly revenue increased 34% to $461 million and its annual recurring revenue (ARR) rose 50% to $825 million. AXON’s software division is growing much more quickly than its hardware, which is improving the overall profitability of the business. AXON’s net margin was 0% in both 2019 and 2020, but rose to 12% in 2022 and 11% in 2023.
AXON has recently introduced its latest product innovation, Draft One, a “game-changer for police reporting”. This AI-powered software analyzes body-worn camera audio to generate high-quality incident reporting in seconds. American police officers are currently spending a staggering 40% of their time — roughly 15 hours per week — on administrative tasks such as report writing. Draft One tackles this burden by automating key parts of the process, while still keeping the human in the loop to ensure accurate reporting. According to AXON, the product saves each officer at least 5 hours of administrative work per week. Considering there are approximately 800,000 sworn officers in the US, the product is capable of generating significant economic value.
Although AXON remains a high-conviction recommendation for me, investors should be wary of the company's history of paying high levels of stock-based compensation, which doubled in the latest quarter to $75 million due to a one-time enhanced equity compensation program provided to employees whose compensation is under a specified threshold.
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