This quote from Axon’s CFO should inspire investors to buy

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During its fourth quarter earnings call, Axon Enterprise ( AXONE -3.08% ) and its chief financial officer, Jawad Ahsan, essentially put the company’s cards on the table for all to see, acknowledging that it had reached a critically important threshold for investors.

Speaking about Axon’s three pillars of its financial strategy – revenue growth, leverage and cash generation – Ahsan focused on free cash flow (FCF) generation and its ability to maintain “agile and flexible” company. Outlining exactly how this would work, Ahsan said, “This flexibility will be built on the stable foundation of a subscription-based business model that generates highly recurring cash flow.”

Image source: Getty Images

With Axon having a history of generating lumpy FCF (to put it mildly), let’s discuss why this quote is so crucial to company operations and, ultimately, long-term investor returns.

Axon plans to become an ATM

Axon is an Arizona-based company that develops weapons technologies and products for military, law enforcement, and civilians. It is best known as the manufacturer of the Taser electroshock weapon, but it has expanded its product line and now manufactures products such as police body cameras, dash cams and various technologies and services for storing and analyze captured video footage.

Axon has seen strong sales growth over the past decade, driving its share price up more than 3,000% over the same period.

However, as the business continues to mature, it will be of utmost importance to turn this sales growth into free cash flow (FCF) as its operations continue to grow and achieve efficiencies. more substantial.

AXON Revenue Table (TTM)

AXON Revenue (TTM). Data by YCharts. TTM = last 12 months.

As the chart above shows, Axon’s revenue growth was smooth up and to the right, but its FCF took a more turbulent path towards an overall increase.

This volatility in FCF is primarily due to Axon’s transformational change in its operations, which has gradually shifted from selling Taser-only to a subscription-based offering built around the company’s budding Axon cloud. Trading short-term margins for long-term recurring sales, FCF has been understandably lumpy, but looks set to show steady growth.

With 65% of the company’s Taser sales coming from subscription plans and most of Axon Cloud’s revenue being recurring in nature, the company has a solid foundation on which to build its slot machine.

Axon Cloud is crucial for investors: it connects all of the company’s law enforcement products and services, creating a justice-focused ecosystem.

What this means for Axon’s stock

With a gross margin of 74%, these Axon Cloud sales represent an incredibly high margin and help support Ahsan’s theory of becoming a slot machine through his recurring revenue and subscription packages.

Management expects FCF of $125 million to $145 million in 2022, compared to $74 million in 2021. Using Axon’s market capitalization (or company price) of $9.7 billion , that would leave it trading around 70 times the forward FCF.

It is a relatively expensive assessment. But with management focused on increasing FCF and its high-margin Axon Cloud growing 36% in 2021, the company’s stock could look cheap a decade from now.

Additionally, with a target addressable market of $52 billion set by management in November 2021, Axon’s market capitalization may prove far too small given its decades-long ambitions.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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