Axon Enterprise is a leader in public safety technology. In this investment deep dive video, I’ll unlock a comprehensive understanding of what makes $AXON tick, and how it’s shaping a better future through technology and innovation.
My goal is to empower you with the insights needed to decide if Axon is right for your portfolio.
Stay tuned over the coming months as I highlight many of the extraordinary companies in my own portfolio. These aren’t just incredible investment opportunities; they’re catalysts for positive change in the world. I’ll reveal why they made my list, and provide you with in-depth analysis — all for free.
Segments:
[00:00:00] Introduction
[00:00:40] Agenda
[00:01:33] Axon at a Glance
[00:04:28] How Axon is Creating a Better Tomorrow
[00:06:51] Axon Evidence
[00:09:21] Recent Acquisitions – Sky-Hero
[00:11:25] Recent Acquisitions – Fusus
[00:12:24] Recent Acquisitions – Dedrone
[00:14:30] New Products – Body Camera Workforce
[00:16:14] Competitive Landscape
[00:17:43] Financials – Income Statement
[00:20:27] Financials – Income Statement (Gross Margin)
[00:21:53] Financials – Income Statement (Stock-Based Compensation)
[00:23:42] Financials – Balance Sheet
[00:25:27] Financials – Cash Flow Statement
[00:25:58] Valuation
[00:27:26] Investment Conclusion
[00:31:17] Closing
Axon Deep Dive – August 2024
[00:00:00] Introduction
Hi, I’m Luke Hallard, and today we’re diving into Axon Enterprise,
a company at the forefront of public safety technology. Why should you stick around for this video? Because I’m not just going to talk about the company. I’m also going to unlock a comprehensive understanding of what makes Axon tick and also how it’s shaping a better future for all of us through technology and innovation.
My goal in today’s video is to equip you with the knowledge to assess why Axon might be the right or wrong investment for your portfolio. So are you ready to dive in and learn what makes Axon a potential game changer? Let’s get started.
[00:00:40] Agenda
Here’s what we’re going to cover in today’s session. I’m going to give you an overview of Axon. Then we’re going to dive into exactly how the company is creating a better tomorrow. We’re going to take a look at Axon Evidence and why it’s crucial to the investment thesis.
Then we’ll take a look at a couple of their recent acquisitions, Sky Hero, Fusus and Dedrone. And we’ll take a quick look at one of their new products, Body Camera Workforce. We’ll have a scan across the competitive landscape, and then I’m going to go deep on the financials. We’re going to look at the real Income statement, balance sheet and cashflow statement for Axon from its latest quarter.
We’ll take a high level look at the valuation and try and understand how cheap or expensive this company might be. And then I’ll give you my overall investment conclusion, which would be my investment thesis in five bullets and then my five key risks.
[00:01:33] Axon at a Glance
Axon is a major provider of public safety solutions. They basically invented the TASER, and the company used to be called TASER until it became Axon. They’ve got a range of body cameras, in car cameras, they call them fleet cameras, drone cameras, and it’s all brought together with the Axon Evidence software platform, which is the world’s largest repository of digital public safety evidence.
And overall, these are the three segments. That acts on tracks, the business around taser cloud and sensors and others, which is really all of the cameras. Who knew that the US has 18, 000 different law enforcement agencies? It’s a massive country, but it’s crazy that it’s so distributed. That’s the case today.
And Axon has partnerships with over 94 percent of those 18, 000 agencies, but it’s not just in law enforcement. It’s also embedded in public safety organizations all around the world, federal agencies, The military, also private security, British transport police use Axon cameras, and there’s an incredible network effect once you start taking up usage of some part of Axon’s product suite because customers come in with maybe with tasers, maybe with cameras, maybe in the case of the Scottish government with Axon evidence first.
But then they often essentially land and expand, they buy one capability and then they spread their needs as they see the benefits of the unified hardware and software platform and they spread out and buy more and more increasingly. The company is predominantly a US company today though. 86 percent of its revenue is earned in North America.
So there’s a really interesting opportunity as they expand overseas and build up that international revenue. And maybe just to bring a little bit to life, some of the areas where they’re doing that today. Puerto Rico is using Axon body cameras. There are major agencies across Canada that have deployed Axon taser in Puerto Rico.
South America, Sao Paulo, military police are outfitting 7, 000 of their officers with the Axon 3 body worn camera, plus Axon evidence. In the Netherlands, the Dutch police are using Axon tasers. And then even Asia, It’s potentially a big expansion opportunity for the company, and they’re already deployed in the Maldives with the Maldives police service.
And I think they’ve got 200 officers today using Axon body cameras, plus again, Axon evidence. So you can see massive impact. Penetration, very little competition for us policing, which is really their main market, but also they’re getting their fingers into lots of other pies around the world.
[00:04:28] How Axon is Creating a Better Tomorrow
And how is this company creating a better tomorrow?
Well, I think its mission brings us to life most clearly. Their mission is to protect life, capture truth, and accelerate justice. Their goal is to make bullets obsolete, reduce social conflict, and create a more equitable justice system through technology and innovation. Two years ago, moonshot goal, which was to cut gun related deaths between the police and the public by 50 percent by 2033.
So they’re going to do that by increasing transparency with things like their body cameras and their sensors, but they’re also going to improve that by delivering tasers, energy weapons, that are almost on par with With a real firearm. And so an American police officer might start using their Taser more often rather than going for their handgun.
And the latest generation of Taser 10 from Axon now has an effective range of 45 feet, which is interesting because the large majority of. Officer shootings happen within 40 feet and the Taser 10 can also now deploy 10 probes. So 10 shots on goal essentially, and as long as the officer can get at least two of those probes in, the Taser, will intelligently find the best two to run a current through to incapacitate the target.
So this makes the taser much more effective and gives it much more stopping power and reliability for an officer, which hopefully leads to officers using their taser more frequently. The latest generation body for camera isn’t just a camera. It’s also a two way communication device. So that means your officer in the field can connect real time with the control center, share real time video.
An example use case that’s been seen is if the officer doesn’t speak the same language as the individual face to face with, they can get translation support in real time from a colleague who maybe speaks that language, in the control center. And then the latest generation camera also has a watch me feature.
So the officer just hits a button and then they’re immediately requesting oversight and monitoring to get an extra level safety. If there may be in a difficult situation.
[00:06:51] Axon Evidence
Now we mentioned Axon Evidence as being key to the investment thesis. Let’s explain why. It’s a cloud based platform for the storage and distribution of digital evidence. So that’s. videos, photos, audio, documentation, and it works seamlessly with the tasers and the sensors. And also citizens can directly go online to evidence.com and they can upload their own mobile phone video. So that aggregates information from lots of different sources and it has it in this one centralized repository. So you can see already that’s beneficial, it just simplifies workflows. But Axon Evidence also has a whole bunch of AI capabilities, including leaning on recent large language model innovations to really get efficiencies for the police.
evidence. com captures the information, automatically transcribes what’s been said. If there’s video, there are capabilities to automatically redact elements from the scene that are not relevant. Maybe that’s licensed plates, passing cars, maybe that’s computer screens with sensitive information might be the faces of bystanders from uploaded video.
redaction used to be done by hand frame by frame in some cases, quite complicated. By having all the evidence in this secure repository, Axon Evidence, it preserves the chain of custody. And it means that as an officer builds their case for the court system, they can easily package up the relevant information that’s been redacted and is court ready and then share it directly with prosecutors and public defenders, as well as with other agencies for intelligence sharing.
And then. Axon’s latest capability, they announced a few months ago in this space, is Draft One. So Draft One can automatically draft a high quality report narrative in seconds from body worn camera audio. This is really valuable because today police officers spend up to 40 percent of their time writing incident reports and using draft one, it’s estimated that police departments can save one day per week per officer. So, that’s an incredible efficiency for police departments, allowing them to focus policing time on actually delivering policing outcome, not just administration.
[00:09:21] Recent Acquisitions – Sky-Hero
The company has been on an acquisition tear. So I’m going to bring to life three recent acquisitions. The first one is a company they bought in July, 2023 called Sky Hero.
So Sky Hero was a European company that manufactures tactical UAVs and UGVs. Some pictures on the slide here, you can see a UAV drone and also unmanned ground vehicle. these vehicles are deployed tactically by the officer in a potentially dangerous environment, and they’re able to carry payloads into unknown environments, including things like distraction technologies.
a sound emitter that can blast up to five shots of over 165 decibels, or a strobe LED laser light, super bright to confuse and create chaos in an environment before the officers perhaps breach what might otherwise be a dangerous situation. And Axon plans to do that.
to introduce these capabilities into its Axon Air platform. Now, throughout this deck, I’m going to pick up a few items that I think are controversial or potentially a risk. And here’s a really important one. Is it right that uncrewed vehicles could be equipped with tactical capabilities like these distraction capabilities?
Potentially, this is quite controversial. And in fact, Axon ran afoul of this back in June, 2022 and nine members of its AI ethics board resigned criticizing a project that was looking at a pilot of having a drone mounted taser. to be installed in schools across North America, potentially to prevent mass shooting events.
The ethics committee has been reformed since then, and the new members seemingly don’t oppose the use of Sky Hero tactical uncrewed vehicles. However, if these are used in inappropriate ways, the company could face a reputational risk. So worth keeping an eye on.
[00:11:25] Recent Acquisitions – Fusus
Let’s dive into their next acquisition, FUSUS, who they bought in February this year, 2024.
FUSUS strengthens Axon’s roadmap for real time operations by enabling secure connection to critical data sources, which include CCTVs and camera feeds from other local businesses. So essentially, the control room for the police, their view of the world. Suddenly extends beyond body cameras and fleet cameras and their own infrastructure to CCTV and street cameras across the city, perhaps allowing them to in real time, get a much better handle on a situation and what’s going on.
This integration of FUSUS into Axon is going to really complement the company’s real time operations capability, particularly Axon Respond, which allows FUSUS. Agencies to obtain a seamless connection to critical data sources during an unfolding incident.
[00:12:24] Recent Acquisitions – Dedrone
The company’s most recent acquisition is Dedrone, who they purchased in May 2024. Dedrone is a leader in managing smart airspace. they have two key capabilities that really interests Axon, and I think are incredibly additive to the company’s capabilities.
For one, Dedrone can detect and track and manage airspace, essentially making sure that the drones flying in controlled airspace, good drones that you know about and you’re in control of, not potentially enemy drones, if it’s a military installation or terrorists, perhaps of a major sporting event, or maybe people smuggling drugs into a prison or other controlled environment, and Dedrone.
Defenses are already in place in more than 800 sites in 31 different countries, and they’re actively used by five of the G7’s governments. But dDrone isn’t just about monitoring and managing airspace, it also enables a capability of surveillance. For drone as first responder. and so let’s break down what that means.
Today, if you want to fly a drone, it’s got to be within visual line of sight of the drone operator. So if you wanted to send a drone, into a developing security situation, well, you couldn’t fly a drone there from miles away. You’d have to have an officer on the ground, launch their drone.
And then have it in line of sight to be within the regulations. Well, Dedrone allows that drone operator to be in a control room, not at the scene, and they can remotely manage fleets of drones.
And a great example of this is happening in Michigan right now, where this technology is being piloted by the Michigan Sheriff’s office.
They’re getting drones to the scene of incident within three minutes, which is way faster than a police crew could typically get on scene. And 65 percent of calls in Michigan are being responded to by drone as first responder, which is mitigating the need for so many ground units.
[00:14:30] New Products – Body Camera Workforce
And now let’s wrap up this part of the deep dive with a quick look at a new range of products the company’s launched, Body Camera Workforce. Axon launched these in January this year, and it’s a new generation of their body cameras designed for frontline retail workers in places like retail stores, healthcare facilities, restaurants.
a recent survey by Axon found that in the U S nearly half of retail workers have experienced a violent incident while on the job. And so in trials with Axon body camera workforce, one retailer saw an over 50 percent reduction in incidents and another reported nearly 50 percent of incidents being effectively deescalated after the camera was activated.
these are existing Axon cameras as used by. security agencies, but custom color shells allow them to blend in seamlessly with a company’s brand. So it almost becomes part of the uniform. And then these cameras can also seamlessly integrate with axon evidence. for example, to facilitate information sharing with the police, perhaps if there’s going to be a prosecution, body cameras might again, seem quite dystopian, and perhaps even promoting a surveillance state. There’s lots of good evidence that when body cameras are deployed, citizen complaints on the police fall by up over 80 percent, the use of force falls by nearly 60 percent, and officer court time is reduced by 70 percent as it no longer relies on hearsay, there’s real video to enable the court to come to a better quality legal outcome.
[00:16:14] Competitive Landscape
The competitive landscape is really interesting for Axon. Its primary competitor is Motorola, and Motorola has a similar range of body cameras and radios and also a unifying software platform to support law enforcement and federal agencies. But Motorola does a lot more too. They’ve got a huge range of products.
and so their engagement with law enforcement is really a subdivision within the company. That means although Motorola are a fearsome competitor to Axon, Axon can be far more focused And really be the experts in this narrow field.
And I think that’s why we’ve seen Axon cameras be adopted by nearly 94 percent of us police forces. There are other smaller competitors. One that’s perhaps notable is a tiny little company called Digital Ally, and they also have a range of cameras and fleet cameras that are sold to law enforcement.
However, it’s a much smaller company, revenues of just 26 million a year. And they had a run in unsuccessfully with Axon a couple of years ago. They were trying to sue the company for patent infringement. and in 2020, that case was thrown out by the U. S. Circuit Court of Appeals, who found in Axon’s favor. One really important thing to watch with any investment is customer concentration risk. Are you in danger of perhaps losing one major customer that could really impact your business?
This is not an issue for Axon in any way.
[00:17:43] Financials – Income Statement
Okay, let’s turn to the financials. I’m going to take a look at all three of the main financial statements. These are from most recent quarterly results, which is the three months ending march 31st, 2024. Here’s the income statement.
You can see a snapshot on the right hand side of the slide. Latest quarterly revenue for the company was 461 million, which is up 34 percent year over year, really nice growth. But the most important factor to look at is something called annual recurring revenue. How much of that revenue is baked in and can the company rely on after month and ARR.
is now up to 825 million a year growing at a compound annual growth rate of 44%. So that’s really good high quality revenue, which is recurring and growing much faster than revenue overall. And another really interesting fact that Axon publish is how much of their revenue is tied to subscription bundles.
That’s now up to an incredible 95%. So what does that mean? A police department has a contract with Axon, they subscribe for tasers, which also includes the replaceable taser cartridges. They subscribe to axon evidence, the cloud software platform, they buy a ton of cameras and those contracts are up to 10 years long.
So axon, perhaps more than any other company I can think of as an investor, you can be so confident in the continuity of revenues and the trajectory. They’re essentially baked in for life. Over five years to come,
a couple of useful things to look at sometimes for any company is, what does the company spend on sales, general and administrative costs, SG& A as a proportion of total revenue. This is about a third of Axon’s revenue being spent on sales, which is within historical norms.
And it’s also pretty typical for companies like this, so no red flags there. and of course, sometimes companies forecast and give investors a sense of where they anticipate their revenues being in the future. Well, Axon’s forecasts for the full year 2024 94 to 1. 99 billion, up 26 percent year over year. I flagged that red as maybe that’s a little bit of a conservative forecast, and we should note that Axon increased that forecast as part of announcing their most recent results, increasing it from 22 percent growth to 26 percent growth.
[00:20:27] Financials – Income Statement (Gross Margin)
while we’re on the income statement, let’s also take a look at the gross margin because I think this really illustrates the importance of Axon Evidence. Axon is increasingly becoming a software company. The cloud and services segment is growing much faster than the rest of the business.
With a 47 percent annual growth rate versus 32 percent growth for all revenue. And that cloud and services segment runs at a 73 percent gross margin versus a 61 percent gross margin for all revenue. Now, what does that gobbledygook mean? It means that for every hundred dollars Axon earns as software revenue, it keeps 73 percent of that, which can then be used to pay for operational costs, like research and development and sales and marketing.
overall, this software segment is a really significant part of the business. Today, it’s about 40 percent of total revenues, up from 36 percent a year prior. So what have we got here? A really valuable set of capabilities that are highly profitable for the company and are increasingly becoming more and more important.
of the revenue base. So as Axon gains maybe a new customer through its tasers or its cameras, and it cross sells them onto its Axon Evidence software platform, it’s becoming an increasingly efficient, profitable company.
[00:21:53] Financials – Income Statement (Stock-Based Compensation)
Now, a red flag slide. Stock based compensation. And again, we still see this on the income statement. Axon is infamous for having high levels of stock based comp. In the latest quarter, operating expenses were 244 million. That was made up partly of 75 million in stock based comp.
That’s just over 16 percent of revenue. That is really high. The company is paying themselves first, and that’s not great for shareholders. Stock based comp has also increased this year as a result of stock awards made in January to employees whose compensation was under a specified threshold.
I like that. That’s a good sign that the company is rewarding its lower paid employees and driving a good culture and employee retention. But overall, that stock based comp is not pretty. And the impact on shareholders is that the overall share count goes up and shareholders get diluted.
And in the last year, if you were an Axon shareholder, as I was, You were diluted by 4. 4%. That’s high. That’s actually trending down from even higher levels. So I really want to see stock based comp as a proportion of revenue to come down even further in future quarters. I want to see that being a sustained trend.
an interesting quirk here is how axon measure their stock based comp awards. They’ve got a number of metrics. They’ve got good metrics like revenue growth, which is great for shareholders, but they also use metrics around adjusted measures like adjusted EBITDA.
And that can easily be gamed by management and manipulated through aggressive accounting practices. It’s not pretty.
[00:23:42] Financials – Balance Sheet
Let’s move on to the balance sheet. Axon is really well capitalized. They’ve got over a billion dollars in cash, marketable securities, and short term investments with a current ratio of 2. 9. They’ve also got a nice stable inventory levels around 120 to 125 days of inventory outstanding, which makes sense when you think about the nature of the company.
A red flag on the balance sheet is this increase in goodwill from 60 million to over 300 million in the reported quarter. That’s happened because the company has been on that acquisition spree buying up companies like Fusus and Dedrone. And that goodwill on the balance sheet could get written down in the future, which could impact the financials if the company’s not able to to extract value from those acquisitions in the way that they hope.
There’s no real debt in the company, but there is 690 million in convertible notes, which were issued back in December, 2022. those have a five year term. So that we’ll see those sitting on the balance sheet for a good few years to come.
And then reflecting back on those 10 year contracts that customers typically have, one really great thing to look at in the quarterly results our remaining performance obligations. Axon has RPOs of over 7 billion now. What does that mean?
It’s revenue that’s been contracted. Essentially bought by customers, but not delivered yet. it’s work in the pipeline, which gives shareholders, again, this really high confidence about the trajectory of the company and where their future revenue is going to come from.
[00:25:27] Financials – Cash Flow Statement
Let’s take a quick look at the cashflow statement, then we’ll start to bring it all together and look at the valuation.
The key items to note on Axon’s cashflow statement. all relate to their acquisitive nature. We’ve seen a number of puts and takes on the cashflow statement related to the change in value of companies that they’ve already acquired or investments that they’ve already made.
and in here we can also see 237 million, which in the main relates to those recent acquisitions.
[00:25:58] Valuation
Okay. Axon’s valuation. And I’m afraid this is a great company, but it comes at a high price. Today, Axon trades at 23. 6 billion, which is 23 times gross profit. That’s pretty eye wateringly expensive.
And if we reflect on Motorola, their nearest comparable, Motorola trade at just under 13 times gross profit. So, one way to look at Axon would be that it’s almost twice as expensive as Motorola. I really like to use price to free cashflow when I look at growth investments in my portfolio, but unfortunately free cashflow isn’t the best metric to use for Axon, mostly because they’re a serial acquirer, they don’t hang on to that cash.
but if we were to try and do a reverse Discounted cash flow valuation for the company using trailing 12 month free cash flow of 162 million and a 9 percent discount rate, which I think is appropriate as the company is a lower risk investment.
then today’s valuation expects that free cash flow is going to grow at over 31 percent a year for the next 10 years. Now, that’s not out of the question, and as the company starts to digest these acquisitions, perhaps it will slow down future material acquisitions and we’ll start to see the company becoming more optimized for free cash flow, but no argument, Axon is a very expensive company.
[00:27:26] Investment Conclusion
Now let’s wrap it all up with a conclusion. My thesis for Axon hinges on five factors. Their technology is deeply embedded with their customers, and creates very high switching costs. It’s just really hard for a police department to move from Axon to a competing, Provider’s technology. And there’s no one really out there that has the same unified product suite.
And what that means is that we have these really high levels of recurring revenue and these incredibly long contracts with customers up to 10 years in many cases, so we can be really confident as investors in the trajectory. of future revenues. The company is a serial acquirer, but I like the capital allocation decisions that have been made by founder CEO Rick Smith.
I really think Sky Hero, Fusus and Dedrone are complimentary to Axon’s mission and definitely R& D investments in capabilities like Draft One create incredible end value for police departments, perhaps saving them. Almost 20 percent plus of officer time, which can be spent on real police outcomes.
The company’s early in its international growth phase, 86 percent of revenues of domestic from North America. So we’ve got a really interesting international opportunity here, and we’re starting to see that as Axon rolls out its capabilities around the world. And then finally rock solid financials and a rock solid balance sheet.
They’ve got a ton of cash on the books and those margins are improving rapidly as the company increasingly transitions to becoming a software rather than a hardware business.
But of course, investing in Axon comes with risks too. And just to summarize a bunch of these. Number one for me is the valuation. It’s really expensive at 146 times free cash flow today, but it’s not optimized for free cash flow. So I’m hoping we’ll see that picture improving in future years.
Of course, there’s a huge cybersecurity risk here for the company. It holds extremely sensitive data, and if they were to suffer a cybersecurity breach, that could be devastating to their reputation. They’ve taken on a bunch of big acquisitions, and so they’re really carrying quite a lot of financial risk.
If they have to take a goodwill impairment, if one of those recent acquisitions doesn’t play out the way they hoped. we had that anecdote earlier about the AI ethics board resigning because of the company’s plans to deploy armed drones in schools. So there is a reputational risk if Axon progresses.
It’s Sky Hero tactical drones as part of the product suite. and then interestingly, last August, Reuters reported Axon’s unusual workplace culture with top executives, allegedly testing the loyalty of workers by pressing them into having group tasings and tattooing sessions with having the company’s logo tattooed onto their bodies. That’s a pretty wild bro culture that may not be healthy and could create a cultural risk. so what do you think is Axon right for your portfolio? it’s certainly right for mine because I love companies that are making the world a better place.
And I think Axon is a prime example of that. We’re recording this video on Sunday, the 28th of July, 2024, and Axon are due to release their full year results in just two weeks time. So I’ll really be looking hard at how those margins are improving, whether the stock based comp has hopefully come down a little bit further, and of course, I’ll be checking in on those ever increasing levels of recurring revenue, because I really think they’re key to the thesis.
[00:31:17] Closing
So thanks for joining me on this deep dive into Axon enterprise. We’ve covered a lot today from their innovative technology to their impact on public safety and what it all means for investors. If you’ve got questions about today’s content or if there’s something more you’d like to know, I’d love to hear your questions.
I’m excited to see what you’re curious about. And to engage in some lively conversations, here’s my social handles. You can find me at any of them, but my favorite place to chat is Twitter or X where I’m @7LukeHallard. If you found this video enlightening, do me a favor and help spread the knowledge by giving it a repost on your own feed.
If you share these insights, we can build a community of informed investors. And your support means a lot to me. Thanks for watching and good luck in your own hunt for those elusive, but fantastic companies that are not just great investments, they’re also building a better tomorrow.
