Axon Enterprise stock is a buy on withdrawals (NASDAQ: AXON)

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Investment thesis

Axon Company (NASDAQ: AXONE) The Taser brand is an unparalleled brand monopoly.

AXON has adopted a high-margin SaaS model with predictable recurring revenue. Products and services work together in a bundled ecosystem that creates a network effect.

AXON is growing faster than its competitor in terms of turnover. Although it is a fast growing company, it has no debt and generally operates with net cash.

AXON is turning to the consumer market, potentially increasing its TAM from $27 billion to $52 billion.

Company presentation

Axon Enterprise provides a variety of law enforcement products and solutions. Based on investor presentation in November 2021, these are the company’s high-level missions.

2021 Investor Presentation

AXON Mission (Investor Presentation 2021)

Generally, the company seeks to provide a non-lethal alternative to resolving disputes in order to restore public order without loss of life and to deter conflicts from occurring by providing tools to ensure the prevalence of justice.

here are the main products and services proposed to achieve these objectives:

  1. Conducted Energy Weapons (HAVE)
  2. Cameras
  3. Software

CEWs are electrical devices that disable threats using low, non-lethal electrical currents. AXON’s AI products are delivered under the TASER brand. As we will see later, there is currently no alternative to this TASER brand.

The cameras are carried by the police officers. In the aftermath of a dispute, the images captured by these cameras provide evidence to ensure a fair resolution of potential complaints. With this ability, they also act as a conflict deterrent against potential attackers.

AXON’s suite of software products leverages technology to facilitate law enforcement activities in the areas of productivity, real-time operations and mobile applications. With Tasers and other products, AXON has built an ecosystem of connected sensors and software in a high-margin SaaS business model. Some analysts have even described it as the “Apple” of law enforcement.

In the public safety segment BODY (Computer Aided Dispatch), AXON faces competetion from some publicly traded companies like Digital Ally (DGLY), Tyler Technologies (TYL) and Motorola Solutions, Inc. (MSI).

The company’s market is primarily in the US region and management expects a strong increase in TAM from $27 billion to $52 billion, primarily from the consumer segment.

Brand monopoly unmatched in TASER

Stun guns and Tasers are often used interchangeably. In fact, they are different devices. This article summarizes the main differences:

STUN GUN VS. TASER

STUN GUN VS TASER (best gun)

The main difference in usage is that Tasers can stun and incapacitate threats from a distance, while stun guns can only do so in close contact. Currently, there is no alternative to these long-range “Taser” products.

An attempt by PhaZZer Electronics to imitate the Taser product resulted in legal action by Axon and declared bankrupt. It further shows the determination and ability of the company to defend its brand and intellectual property.

According to dictionary.com, ‘tase’ is a verb used to describe stunning a target using a ‘Taser’. It is similar to ‘google‘ being used to describe searching for information on the Internet using the ‘Google search engine’. This suggests the establishment of a very strong brand monopoly. Indeed, according to this article“Nearly 90 percent of the 18,000 police departments in the United States use Tasers.”

Law enforcement solution delivered using a high margin SaaS business model

SaaS business models are characterized by the ability to generate high gross margins with recurring revenue. Apparently, AXON has capitalized on this advantage by offering fully integrated hardware and cloud software solutions under a SaaS business model. During the presentation to investors, an illustration was provided of how revenue is collected from a typical set of sales.

2021 Investor Presentation

AXON Bundle (Investor Presentation 2021)

From this illustration, we can see the multiple recurring revenue streams that can be collected:

Product / Service

Recurring revenue frequency

TASER equipment

5 years

Camera hardware

3 years

Hardware warranty

Annual

Axon Cloud Software

Annual

TASER cartridges and training

Annual

Over the long term, this SaaS model has resulted in a CAGR of 46% over the last 5 quarters. Since 2016, the contribution of recurring revenue has steadily increased and currently represents 73% of total revenue.

2021 Investor Presentation

Recurring revenue (Investor Presentation 2021)

With these multiple recurring revenue streams, the company is likely to maintain its current high growth rate for a very long time.

The top line is growing faster than competitors

Although there are no competitors for the company’s Taser brand, in the CAD segment, some competitors do exist as described by this article and these are Digital Ally, Tyler Technologies and Motorola Solutions, Inc.

Below we compare some financial figures of AXON with these competitors:

Looking for Alpha

Margin Comparisons (Seeking Alpha)

Here is the information we may collect:

  1. AXON clearly has an advantage in terms of revenue growth, growing much faster than its competitors at almost 30%.
  2. Gross profit is also the highest among its competitors at more than half of its revenue, suggesting that its products and services are more welcomed by customers.
  3. Unfortunately, point 2 has been reached with a relatively high operating cost, mainly due to “Sales general and administrative expenses” and “R&D expenses” and therefore the net margin is currently negative. These two cost elements are essential for expanding into new markets. Therefore, we believe this is reasonable and not a serious concern.
  4. Despite the loss of net profit margin, AXON still maintains a positive cash profile without any debt. The other competitors on the list either have less cash than AXON or take on more debt.

AXON presents the characteristics of a high-growth, low-leverage and cash-rich company. Building on the TASER brand monopoly, the company moved into a high-margin recurring revenue SaaS business. The company is currently not profitable in recent years due to increased investment in future growth projects. However, as AXON’s customer base matures and the business reaches its size, we expect it to become profitable over time.

Future growth plans

During the final call for third quarter 2021 resultsAXON reveals that the largest addressable market, almost untapped, is in the consumer segment. From the presentation slides, we can see that the “consumer safety” market is $17.8 billion, the biggest increase from just $1.9 billion.

2021 Investor Presentation

TAM (Investor Presentation 2021)

Recently, the company released the ‘TASER Bolt 2‘ for the consumer market. This product is designed to appear more discreet than the original TASER products intended for law enforcement. Notably, when paired with a companion app, it is able to alert the local emergency service when the device is out of charge. Since TASER products are traditionally used by law enforcement rather than “the man on the street”, some analysts have reservations about whether it will be well received by consumers in general.

In my view, these concerns are mild. During the earnings call, management also mentioned that in the US market alone, TASER is still less than 25% penetrated by professional users, who make up the traditional law enforcement segment. Therefore, even without the untested consumer market, AXON still has a large addressable market to expand into this segment.

Evaluation

AXON appears to have a more consistent operating cash flow versus free cash flow. We will assume that the stock price will be based on the future operating cash flows generated.

We will make the following assumptions in our valuation of the company using the 20-year discounted operating cash flow model:

  1. AXON will grow by 18.8% over the next 5 years, based on the “Next 5 Year EPS” growth value of Finviz.
  2. AXON therefore halves its growth, with growth of 9.4% from year 6 to year 10.
  3. AXON matures in growth from year 11 to year 20, with growth of 6.9%, the same as the last US GDP growth rate.
  4. The operating cash flow value to be projected is $145.9 million, taken from the TTM period.
  5. the discount rate is estimated at 7.88%.

Based on the above data, the present value (PV) of projected free cash flow per share for AXON is $69.70.

Author

Intrinsic value (Author’s calculation)

Taking into account the total debt and cash held by the company, the final intrinsic value is $78.19.

Author

Final intrinsic value (author’s calculation)

The current price of $78.19 implies that the stock is currently overvalued.

Investment risks

Although positive in terms of cash flow, the stock is still not generating positive net earnings due to heavy investments to execute future growth plans. Although the growth plans look promising, there is a small chance that they will not succeed, especially in the brand new consumer market.

Conclusions and key points for investors

AXON’s Taser product enjoys a brand monopoly, as noted earlier. This monopolistic status can be seen from the fact that “Nearly 90% of the 18,000 police departments in the United States use Tasers”. The mark of “Taser” is even strong enough to be verbalized.

The company bundled this brand with other products and services and delivered it through a high-margin SaaS retail offering, providing them with multiple sustainable recurring revenue streams. The interdependence of different products and services in the bundle also creates a network effect to lock in existing customers.

The only problem with AXON as an investment is that they currently do not generate positive net profits. I think this is a relatively minor concern, as the current and future business strategy seems likely to be successful in the long term.

I’m generally bullish on AXON, but currently the stock is overvalued. Investors who are not worried about taking a short-term downside due to market volatility may consider taking a small initial position in this stock and average dollar cost thereafter should the price return closer to value. intrinsic.

Alternatively, more conservative investors can keep this stock on their watch list and only buy when it gets back closer to or below intrinsic value.

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