Forget Amazon, This Stock Has 85% Market Share And 2x Upside

Axon Enterprise stock (NASDAQ: AXON) has had a solid run, rising by almost 3x over the past two years from levels of about $124 per share in September 2022 to about $380 presently. There is a high probability that this run is unlikely to lose steam anytime soon, for this run is backed by solid business performance. For context, Axon Enterprise is a tech company and it has 85% market share in one of its products viz. body cameras that the company sells to police departments in all the major American cities. While market share in only one product should not be the only focus, the fact that the company has witnessed surging demand across its services/product lines, right from cloud services, to solutions for drones and body cameras, indicates that the company must be doing something special. For context, Google (NASDAQ: GOOG) has that kind of market share in search, while Amazon (NASDAQ: AMZN) does not have that in e-commerce. Consequently, barring small fluctuations, Axon’s stock price movement has largely been one-sided since reaching a temporary low below $100 back in June 2022. The stock has gained a solid 48% YTD and has comfortably outperformed its peers in the aerospace and defense industry, viz. Textron (NYSE: TXT), up 8%, Huntington Ingalls Industries (NYSE: HII), down 1%, and Spirit AeroSystems (NYSE: SPR), up 10%, in this period.

Has the peak been reached?

At the current price level, Axon Enterprise stock trades at about 100x trailing earnings and 16x its trailing revenues. Is this a reasonable multiple? Possibly yes! Especially if you consider the fact that the company’s revenues have the potential to grow by more than 30% annually in the next few years. Over the last few years, the company has consistently reported strong revenue growth with an average growth of 30% in the last 5 years and the trend is not likely to reverse anytime soon. Moreover, the company’s net margin has witnessed a significant improvement in the last couple of years to reach over 10%. We outline a path for the stock to rise to levels of about $1000 per share in the next few years by looking at the company’s potential revenue growth, net margins, and its price-to-earnings multiple on the back of a strong sales pipeline, which has grown across product categories and customer verticals.

AXON Has Done It In The Past

AXON stock has generated better returns than the broader market in each of the last 3 years. Returns for the stock were 28% in 2021, 6% in 2022, and 56% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could AXON see a strong jump?

Revenue growth coupled with margin expansion is the key

Axon reports its revenues under two segments – TASER, which includes sales of its conducted energy devices (CEDs), batteries, accessories and extended warranties, and Software & Sensors – which includes integrated hardware and cloud-based software solutions for law enforcement. These segments accounted for 39% and 61% of the company’s total sales last year. While the TASER segment sales have risen 40% between 2021 and 2023, the Software & Sensors segment sales have surged over 2x over this period. Now, the company is focused on improving its recurring revenues from its cloud-based solutions. The recurring revenues have been rising at a fast pace from $327 million in 2021 to $732 million in 2023, and $850 million as of June 30, 2024. The overall increase in public safety spending clubbed with the increasing reliance on recurring revenues will likely propel the company to see meaningful growth in sales over the next few years.

With an increasing scale of operations, AXON is also expected to steadily improve its business margins due to higher absorption of its fixed overheads, which in turn would result in net income increasing by a steady rate. Consequently, if AXON’s revenues grow by about 2.5x between FY’24 and FY’27, with margins expanding by about 1.5x over the same period, this would imply that earnings can grow by around 3.8x. Now if earnings grow 3.8x, the P/E multiple will shrink to less than a third of its current level, assuming the stock price stays the same. But that’s exactly what Axon Enterprise’s investors are betting will not happen! If earnings expand 3.8x over the next few years, instead of the P/E shrinking from around 100x presently to ~26x, we think that the multiple could stand at about 60x. This could make a 2.6x rise in Axon Enterprise’s stock a real possibility in the coming years — with the stock rising to levels of almost $1000. What about the time horizon for this high-return scenario? In practice, it won’t make much difference whether it takes 3 years or 5 — as long as Axon Enterprise is on this revenue and earnings expansion trajectory, with margins trending up, the stock price could respond similarly.

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