AXON reported results

Investment Analysis Clubs Saul’s Investing Discussions
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Okay, I don’t understand the silence about AXON.

Here we have a board favorite, which reported on Thursday, and then rose $134.43 on Friday (not a misprint), for a gain of 28.68% in one day, and no one has even mentioned it ???

Well, as I said, I’m semi-retired and not trying to follow all the numbers in the results that I used to, but I can tell you that it now makes up 33.8% of my investing portfolio after that rise, and it’s my largest position of course.

This is even though I trimmed my position a couple of weeks ago because I thought my position size was getting too big back then. That was because Axon stock price just kept rising steadily. In other words, this was not a turn around that bounced on Friday, but a rising stock (that people who sell a company’s stock because it has risen, had already sold), that massively accelerated. As you know, I have been a strong advocat of buying or holding rising stocks instead of selling them.

I hope that someone will write up in depth what just happened, and why.

Saul

PS – Here are the weekly closes of Axon over the last quarter or so. I’m pulling them off my graph so they won’t be exact prices, but close enough.

$292

$365 - (A rise of 25% in a week. It must have been the previous quarterly earnings report)

$374 - kept going up

$371

$365 - back to the top of that post-earnings rise

$380 - took off again, the first of seven consecutive record weekly closes

$394

$395

$422

$435

$438

$445

$424 – Backed off a little. Up 16% from the $365 close after the earnings three months ago, compounded on to that 25% rise from $292 that came with the previous quarterly report. In other words, it didn’t settle back after the big rise with the report, but the stock price kept rising.

$603 – Then a rise of 29% compounded on to that last Friday, with the current earnings report.

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AXON Third Quarter 2024

Axon started out as TASER, now covers multiple aspects of public safety/law enforcement such as camera’s AI writing reports, data storage.

Q3 2024 revenue of $544 million, up 32% YOY

Raises full year revenue outlook to $2.07 B, up 32%YOY

30% annual revenue growth run rate all three 2024 quarters with 11 consecutive quarters of over 25%

Razor and razors blades for TASER products which also get updated

SAS model for evidence.com cloud storage of data called the AI Era Plan, which

“enables customers to subscribe to an expanding set of AI capabilities and features that further leverage our connected ecosystem as quickly as we can develop them. It provides

new AI features in a subscription offering and gives customers access to unmatched value across our AI innovations by including the newest AI products we bring to market. Its exponential value is fully unlocked when combined with our officer safety plans (OSP). Draft One is one illustrative example already live and in customers’ hands today, utilizing real-time connected body cameras, cloud evidence management, video transcription and generative AI.”

Axon Air - drones as first responder

In Trump World spending on law enforcement/public safety is going to increase, no doubt.

Concerns:

Total company gross margin of 60.8% declined 130 basis points year over year, driven by increased stock-based compensation expense and amortization of acquired intangibles in our cost of goods sold (COGS). Excluding the impacts of stock-based compensation and intangibles amortization, non-GAAP company gross margin of 63.2% increased 50 basis points year over year.

Operating profit of $24 million decreased from $57 million year over year primarily due to increased stock-based compensation expense. Stock-based compensation expense of $102 million included $60 million of expenses related to broad-based equity incentive programs due to expected achievement of operational and time based service components.

Net Income of $67 million (12.3% net income margin), or $0.86 per diluted share, supported non-GAAP net income of $113 million (20.8% non-GAAP net income margin), or $1.45 per diluted share.

Adjusted EBITDA of $145 million (26.7% Adjusted EBITDA margin) increased 54% year over year driven by higher revenue and operating leverage.

Operating cash flow of $91 million increased 45% year over year, supporting free cash flow of $65 million and adjusted free cash flow of $68 million.

Annual Recurring Revenue 652—>732 > 825 > 850 > 885, 12% - 12% - 3% - 4%

Net Revenue retention was at 122% for last 5 quarters

Net sales last two quarters - 14%, 12%

Gross margins stable at about 60%, adjusted gross margin 63% last three quarters.

Non GAAP net income - $79m - 94 m - 113 m, 18%, 20%

Diluted income per share GAAP 81 cents, 53, 86 (9 month 3.12)

Non GAAP - 1.05, 1.22, 1.45 (9 month 3.84 ( 27% YOY) ) -

I would guess annual 2024 non Gaap to be about $5.3 per share (2023 full year was 4.14 x 1.3)

Current PE is 155

PEG for annual revenue would be about 113 then for 2024. Let’s project another 30% for 2025 gets us to a PEG of 87.

Pricey.

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I haven’t owned Axon for a long time but last time I checked Axon was trading around 100x NTM EPS, which is really expensive with EPS expected to grow at around 25-30% for the next few years. Good company, expensive stock.

In my humble opinion, that is the biggest weakness of the board in general - not enough focus/discussion on valuation and the buying of stocks that are way too expensive. Not only is the upside limited on a crazy expensive stock, when a bear market comes, the stocks fall very, very hard. I learned my lesson from 2021-2022 and have completely changed course, I now look at valuation very closely.

TTD is another example - great company but too expensive to own at this point. I don’t think stocks trading at something like 50x NTM EBITDA where EBITDA is only growing at 30% are likely to make a lot of $$$.

When the EBITDA growth over next 2-3 years is 2x higher than NTM EBITDA multiple, then a stock is likely very undervalued, and it may be time to back up the truck.

For example, TMDX NTM EBITDA multiple is roughly 0.5x higher than the expected EBITDA growth rate so there is a lot of potential upside and it is one of my larger positions.

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Hi Jeff

Funny that you should bring up TransMedics to contrast with Axon. As I was reading Saul’s post and then the discussion of results, the growth and profitability, etc brought to mind tmdx, which I owned until recently. Because I had sold out I didn’t take the extra step to actually do a side by side comparison, only thinking to myself that Axon is roughly 10x the tmdx price, and you don’t get a great deal of profits for the price. To say nothing of the frankly remarkable rise over the last few months.

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1968 one word, ‘plastics’ The Graduate.
2025 two words, ‘facial recognition’ Minority Report.
Soon could public safty mean every public interaction involves an employee wearing a body cam with AI facial recognition tapped onto a criminal data base?

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@FoolishJeff I have noticed there has been a bifurcation since 2022 of board members who continued investing in primarily SaaS companies, and others who looked more for growing and profitable companies in other business models.

One of the reasons I see this happening is that the role of profitability of companies and what importance it should play has not been discussed in depth. For the decade when SaaS was growing, it was easy enough to just look at revenue growth and SaaS based metrics to make allocations.

However, now we are forced to adapt as these most of the prior SaaS names are not delivering getting to profitability as fast as they promised. I see Snowflake as the poster child for this, where they were once growing revenue over 100% with a NRR of 160%+. Currently in this last quarter they had -317M of GAAP net income and a 29% revenue growth rate, so clearly this company did not deliver on what they were expected to do since their IPO.

With Axon I see them as one of the rare companies which is on that middle ground of maintaining a 30%+ revenue growth rate, while achieving profitability. It is an interesting hybrid of SaaS recurring revenue and hardware sales. Since it is this hybrid style of company I would expect it to carry a higher valuation because of the recurring nature of the software sales, so it probably does not make sense to be comparing to a medical devices company apples to apples which does one time surgical operations per case.

It is encouraging to see Axon’s hardware sales going up and them expanding internationally this quarter. That had been one of my bigger issues with the company previously, as I thought the potential for Taser ex-US is much larger than US where the gun will be primary for most officers.

While I find the underlying metrics of Axon attractive, I personally sold my shares because of the CEO and not related to valuation concerns. I still have a sour taste from when I owned this company back in ~2007 and the same CEO with his brother drove the company into the ground by buying private jets, marble flooring, and retinal scanners for all employees. Although I do believe the ship has been righted somewhat by the CFO Brittany Bagley, and the CEO’s role has changed to not deal with anything financial anymore.

Additionally, the company paid to have Taser related deaths reclassified to “excited delirium”, and that’s along with Axon’s ethics board resigning in recent years. There have been numerous reports of the company promoting a culture of extreme loyalty encouraging employees to get tased, get tattoos, and live on campus in Axon sponsored housing. I know some would consider these topics OT, but from my viewpoint these are legitimate concerns. So far I have been proven wrong though that these issues might impact their growth prospects.

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I wasn’t trying to compare Axon and TMDX apples to apples, they are different companies, and obvious there is no high margin Software element to TMDX. I was just trying to show that Axon looks overpriced to me, while TMDX looks undervalued.
I agree that most of the pure play SaaS and SaaS adjacent companies have become totally un-investable these days. They trade at high multiples, while most of their FCF gets sucked up by their stock-based compensation. Revenue growth is very anemic - NTM revenue growth is only in the 20-25% range for many of the top names.

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Attached is a snip from my Hypergrowth spreadsheet. My prior spreadsheet posts have been deleted, so I hope some may take a look at the intent of this post before it disappears.

A couple comments

  • I honor the Saul thesis of investing
  • As a newcomer I struggled capturing all the data, and created a spreadsheet to address my mental shortfalls
  • The database includes all tickers owned or discussed here in the past 6 months
  • I update my spreadsheet monthly, so any recent changes may not appear.
  • This is a snip from a small section of my summary of all data on all tickers
  • I sorted this snip by the number of Metric Targets Achieved
  • I do not trade based solely on Metric Targets achieved, but as a tool to pursue the next step in evaluation. It is however an indicator of significant strength or weakness.
  • Axon appears way down in my priority list, so to demonstrate my point I removed 30 or so tickers between AXON and ACMR.

My point is two fold:
I agree with Smart Jeff there is opportunity in weighting value in hypergrowth ticker investing; and, in my opinion, AXON is a great company with great products, but at the moment there are better opportunities int the hypergrowth arena.

Thanks for taking a look

Graydrake

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That is an interesting chart, so much data! Of course the past leaves a lot of clues, but I don’t think backwards looking metrics add much value most of the time, only forward looking ones in terms of valuation.
I’ve found recently that tikr.com does a pretty good job with the metrics. For example you can see that CPNG is trading at 27 times EV/EBITA while it is expected to grow EBITA at a CAGR of 55% over the new 2 years. Thus, EBITA is expected to grow 2 times the EBITA multiple so I think there is a lot of upside here, if you like the company.

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Axon received approval from the Scottsdale, AZ city council to build a new 400,000 square foot headquarters which will also include 1,900 apartments (presumably for employees) and retail stores.

This seems a bit askew from selling tasers and software. These types of capital allocations, which are completely off the grid from the core business, generally portend bad futures for a company’s bottom line and stock price.

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It appears the new HQ will be a spaceship design and along with the hotel, 1,900 employee apartments and retail spaces will cost $1B+.

There are planning commisioner complaints that AXON is bullying them by calling her employer.

Smith is a bit of an out-there-dude.

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Thanks for posting the newspaper article. It sounds like any funds outlay is a long way off. Mr Smith is certainly a visionary, so every chance investors get to know his role at the company is critical.

I really appreciated this article and the video interview of the leaders of the company.

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