Shares of Axon Enterprise (NASDAQ: AXON) have seen a dramatic shift in February, with the stock experiencing a 30% drop earlier in the month before surging 15% today. Despite this volatility, the company’s strong fourth-quarter earnings have reignited investor confidence. But does this growth stock, which has been one of the best performers over the past two decades, still have potential for long-term investors, especially for those considering it in an Individual Savings Account (ISA)?
A Bumpy Ride for Axon
Axon, originally known for its Taser stun guns, has evolved into a powerhouse in law enforcement technology. The company’s product portfolio now includes officer body cameras, a digital evidence management platform, and a variety of software solutions. This ecosystem has proven to be highly sticky, generating predictable and recurring revenue.
However, the stock has faced significant turbulence recently, primarily due to its high valuation. Prior to today’s 15% bounce, Axon had suffered a substantial 30% decline in a week, driven by analysts downgrading its stock from Buy to Hold. The primary concern was the company’s sky-high forward price-to-earnings (P/E) ratio, which currently sits around 90.
Additionally, Axon’s recent decision to end its partnership with Flock Safety, a company that specializes in automated license plate recognition technology, contributed to some market uncertainty. Axon’s management cited Flock’s price hikes for customers using Axon’s tech as the reason for the split, but they have since proposed new terms. The company has downplayed the significance of the situation, calling it “somewhat overblown.”
A Rock-Solid Q4
The catalyst for today’s impressive surge in stock price was Axon’s strong Q4 earnings, which exceeded analysts’ expectations. Revenue jumped 34% year-on-year to $575 million, marking the 12th consecutive quarter of 25%+ growth, surpassing the consensus estimate of $566 million.
Notably, Axon’s Cloud & Services segment performed exceptionally well, growing 41% year-on-year to $230 million—accounting for 40% of total revenue. Free cash flow generation also impressed at $225 million for the quarter, though the company posted an operating loss of $16 million due to substantial stock-based compensation costs, totaling $131 million.
For the full year, Axon reported revenue of $2.1 billion, a 33% increase, and its third consecutive year of growth above 30%. The company also achieved a record net profit margin of 18.1%.
A Growing Market Opportunity
Axon now boasts more than 1 million users across its various software solutions, which include tools for evidence management, real-time operations, productivity, and AI. The company booked over $5 billion in business last year, with roughly half of that secured in Q4 alone, bringing its total future contracted bookings to an impressive $10.1 billion.
The company has also significantly increased its total addressable market (TAM), now estimating it at $129 billion. While such projections should be taken with caution, this suggests that Axon has considerable room to grow over the coming years.
Looking forward, Axon expects 2025 revenue to fall between $2.55 billion and $2.65 billion, representing a 25% increase, and adjusted EBITDA is forecasted to reach $640 million to $670 million, with a margin of approximately 25%.
Risks and Considerations
One of the risks for Axon, as mentioned by management, is the potential impact of US government spending cuts, which could affect the company’s federal contracts. However, Axon views this as an opportunity, as its software solutions support automation and productivity, which may be appealing in a budget-conscious environment.
Despite the risk of fluctuating government spending, the company is firing on all cylinders and delivering robust results, which is why today’s 15% surge is likely being seen as a positive reaction by the market.
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