“Do good whereas doing properly” is the thought that you would be able to put money into good causes whereas additionally reaping vital earnings. That was the thought behind Environmental, Social, and Governance (ESG) scoring which has fallen out of pattern. When 5 ESG information suppliers can’t agree on what’s “good” for society, that’s an issue. Nonetheless, we are able to all most likely agree that instruments that scale back crime not solely profit everybody else, they profit us personally as properly. And if investing in these instruments occurs to indicate large development, then it’s a win for everybody. That’s the case with Axon $AXON, an organization that simply can’t cease rising of their quest to battle crime within the public sector. With 5 consecutive years of over 30% development, they’re on monitor for yet one more based mostly on final quarter’s trajectory of 34% year-over-year development.
What’s Driving the AXON Progress Story?
It’s uncommon for a big firm to publish constant 30%+ income development over an prolonged time period like this. That begs the query, “What’s Driving the Axon Progress Story?” It boils down to 3 issues. First, Axon is nice at upselling their clients. A net retention rate (NRR) of 125% means the common buyer is spending 25% more cash with Axon’s platform yearly, a metric that’s steadily rising over time.
That’s partially the results of worth will increase, however it additionally comes from convincing clients to improve to greater tiers or tack on extra providers. Second is product upgrades. As know-how advances, new Tasers are launched and the outdated ones should be changed which helps Axon seize recurring income from their {hardware}. Third is the corporate’s enlargement by way of acquisition which is mostly much less fascinating since most acquisitions don’t notice the supposed synergies. Nonetheless, Axon’s acquisition cadence appears to be manageable with the money they generate from their operations, and it permits them to enter new markets with out beginning on the bottom flooring.
Maybe what’s most tasty concerning the firm is that software program and providers have gotten an more and more giant part of complete revenues transferring from roughly 30% in 2021 to round 43% as we speak.
Whereas {hardware} has gross margins within the 45-50% vary, software program and providers is far more worthwhile at round 70-75%. Offered they’ll continue to grow the latter, then total profitability ought to enhance over time although it’s already fairly spectacular as we speak.
Axon Inventory – A High quality Firm at a Truthful Worth
Once we final lined Axon over a yr in the past, we praised their accomplishment of the fabled “Rule of 40.” This can be a in style gauge for development shares to see whether or not they’re capable of obtain profitability and development concurrently. It merely takes the corporate’s annual income development fee and provides it to their revenue margin. If the result’s higher than 40%, the corporate passes the Rule of 40. Axon boasted a results of 52% final yr, and so they’re guiding to 31% income development with a 25.5% EBITDA margin this yr, making a sum of 56.5%, or an improved Rule of 40 rating.
Axon is proving they’ll do all of it: develop revenues whereas raking in money. Sometimes firms with sturdy development and juicy revenue margins command a premium valuation, and Axon is not any totally different. In our final piece, we famous Axon’s comparatively excessive simple valuation ratio (SVR) of 16. Immediately that’s dropped to only 13. Whereas that’s nonetheless a premium in comparison with our Disruptive Tech Inventory Catalog common of 8.5, it’s beneath the corporate’s trailing four-quarter common of 17, which might be a greater comparable.
Buyers might even see this depressed valuation and assume there’s worth available, however that comes down to at least one essential query. Can they proceed rising?
Is This Actually a $150 Billion Alternative?
Progress shares obtain premium valuations as a result of it’s assumed that they’ll proceed to develop. Their valuation as we speak costs within the prospect of future earnings. Axon claims they’re serving a $150 billion+ complete addressable market, however how a lot of that market can they moderately count on to seize?
Taking a look at Axon’s investor deck, they break down this chance into seven merchandise focusing on 5 markets. Essentially the most infamous product – the TASER – we’re all aware of, and the identical holds true for the physique cameras splattered throughout YouTube movies nowadays. Their 5 much less seen product strains are as follows:
- Digital Proof Administration: Cloud-based Software-as-a–Service (SaaS) options for capturing, storing, and analyzing video and different digital proof
- AI Plans: An AI instrument used for something from producing police stories to detecting objects in video feeds
- Actual-time Operations: Aggregating sensors and reside safety cameras in a single platform to alert legislation enforcement to behave on legal exercise as quickly because it occurs
- Drones & Robotics: Bodily aerial methods, drone administration software program, counter-drone safety monitoring, and autonomous grounded automobiles for exploring harmful areas
- Car Intelligence: Primarily license plate recognition for visitors and toll enforcement
They’re claiming “AI merchandise” are up 700% this yr, however off what baseline precisely? The corporate doesn’t say, which implies it’s possible nonetheless very small within the grand scheme of issues. These merchandise are all bundled neatly into two classes: Related Gadgets and Software program and Providers which (as talked about earlier) account for 57% and 43% of Axon’s revenues respectively. Moreover, we’re given an additional breakdown which exhibits software program rising quick (40% development in 2025) however it’s not the quickest rising section. That might be “platform options” which grew practically 73% final yr.
Placing product apart, the most important alternative for Axon appears to lie within the Worldwide Authorities market, so we’d count on them to be capturing share as shortly as potential. Nonetheless, our final piece famous that Axon was primarily working within the U.S., and that hasn’t modified. There’s a glimmer of hope that worldwide revenues are rising extra shortly than total gross sales, however not sufficient to maneuver the needle a lot.
Axon claims to solely have 15% penetration within the U.S., and sure much less abroad. This implies there must be loads of room for the corporate to develop, however our query is that this. Why aren’t they already capturing that chance as we speak? The corporate is fast to level out that they’re a “land and develop” sort of enterprise which implies they seize preliminary clients by promoting {hardware}, then promote them into subscription providers whereas upselling extra merchandise over time. Axon’s complete addressable market additionally appears to be increasing quickly, contemplating it was “simply” $77 billion in late 2024. Whereas that’s possible as a result of firm transferring into new industries like AI and robotics, buyers are to consider that Axon’s market share will enhance exponentially over time. That’s, offered they’ll stave off competitors.
The Competitors
Axon notes of their 10-Ok that every one their key industries are “aggressive” or “extremely aggressive” and “fragmented.” This implies Axon has quite a lot of competitors from quite a lot of totally different gamers. That features every thing from area of interest sensor makers to privately held enterprise software program firms to giants like Oracle $ORCL.
Attempting to establish one key competitor is hard, however numerous sources cite Motorola Options $MSI as the most important risk. (Sure, the identical Motorola that made the Razr flip cellphone within the early 2000’s.) Their enterprise has shifted away from shopper electronics and into providing safety, surveillance, and communication options for the general public sector. They provide a few of the identical key merchandise Axon presents together with physique cameras and proof administration software program.
Whereas Motorola is 50% bigger by market cap with thrice the income of Axon, Axon is rising a lot sooner. Motorola’s core enterprise section, Mission Critical Networks (MCN), is rising within the low-single digit p.c vary year-over-year. Axon has been capable of seize market share far more shortly, and in keeping with a report by CivicIQ, an intelligence platform for presidency entities, Axon is presently successful double the variety of offers that Motorola is. Clients cite Axon’s built-in platform as a motive for selecting them over their rivals.
Constructing a one-stop store platform is sensible for a extremely fragmented market, and with authorities budgets all the time beneath scrutiny, Axon is probably going capable of make some bundle offers when cities begin to consolidate from a number of distributors into one: Axon.
One firm which we are able to’t assist however suppose could complement Axon can be one in our catalog that we presently like: SoundThinking $SSTI. There’s only one drawback although. Their revenues are not rising.
Might Axon Purchase SoundThinking?
First issues first. SoundThinking (ex-ShotSpotter) is not a “like” as a result of they’re now means beneath our market cap threshold of $1 billion. This $100 million firm is on the verge of vanishing, and we’re simply left questioning two issues. Why has development stalled, and would this make a pleasant bolt-on acquisition for Axon?
The 2 firms have already got a longtime partnership the place Axon integrates SoundThinking’s information into its “management middle” platform. For instance, SoundThinking can alert legislation enforcement of gunshot inside 60 seconds with a exact location of the occasion. This info will get recorded on Axon’s database and might be aggregated with different proof to assist compile a police report or construct a case. SoundThinking’s license plate recognition and “CaseBuilder” instruments are additionally built-in. SoundThinking additionally has their very own SafetySmart platform which competes with Axon’s core enterprise, so by buying SoundThinking, Axon may consolidate the market a bit. Contemplating Axon’s most up-to-date acquisition value them $600 million, SoundThinking might be shortly snapped up at $100 million.
However right here’s why which may not occur. The place Axon is firing on all cylinders, SoundThinking is faltering. SoundThinking’s gross margins are on the decline, income development has dried up (as we talked about earlier), and so they’re having a tough time closing offers. In 2025, they went from guiding to $112 million in income on the midpoint to delivering simply $104 million. Income outlook for 2026 is $110 million on the midpoint, which might be the second consecutive yr of stalled development. So, the excuse of “delayed contracts and renewals” doesn’t actually fly. Since firms are likely to make acquisitions to spice up development, not drag it down, maybe it’s greatest for Axon to let their competitors fizzle out on their very own.
What’s Axon Disrupting?
The query everyone seems to be asking is: Ought to I purchase AXON inventory? Our course of strikes a bit slower. First we have to determine whether or not we wish to add Axon to our Disruptive Tech Inventory Catalog as a “like” or not. “Liking” a inventory means we’d contemplate going lengthy, which implies Axon must examine all of our containers. Are they a frontrunner? They look like, particularly contemplating their closest competitor is a 100-year-old dinosaur. Are they rising? 5 years of 30% income development would suggest that they’re. Are their gross margins good? In the event that they maintain at 60%, completely, and we’d count on these to rise over time alongside the expansion of software program and providers, although that hasn’t been the pattern traditionally.
One would even count on them to buck this flatlining pattern as software program turns into a much bigger part of complete revenues. The largest excellent query we’ve got is just this. What precisely is Axon disrupting? They’re an incredible development inventory based mostly on the numbers, however we glance to put money into disruptive development shares. Is the software program part of their enterprise adequate for us to contemplate them “public security SaaS?” As for {hardware}, TASER know-how could have been disruptive again within the day, however it’s largely ubiquitous as we speak. What are they disrupting now on the {hardware} facet? It comes all the way down to the expansion of the aforementioned product choices with “platforms” main the cost on development. When software program turns into 50% of revenues or extra, you possibly can argue that is an rising public security SaaS play with loads of development alternatives forward.
Conclusion
Whereas Axon continues shifting into robotics, AI, drones, sensible cities, and IoT, their major merchandise are weapons, physique cameras, and area of interest software program. Positive, the income development speaks for itself, however “doing good whereas doing properly” isn’t sufficient to benefit a spot in our portfolio. This enterprise doesn’t presently appear to suit into any of the disruptive know-how classes we comply with, a minimum of not till their rising applied sciences begin to bear fruit. We’ll proceed watching Axon from the sidelines, and we’ll be sure you inform our Nanalyze Premium subscribers as to our classification determination on Axon inventory.
