I take a longer-term perspective by looking at their years of financial performance and accompanying financial metrics. There is a lot of information publicly available about these companies, detailed quarter-to-quarter analysis and strategies discussion that I do not want to replicate.
Nothing in this article is intended to be financial advice and should not be taken as such, please do your own research before investing.
Axon’s mission is simple and inspiring: To protect life.
Product offerings: Integrated and reinforcing suite
It is most famous for its Taser device (which the company was started with and previously called), an electroshock weapon used to incapacitate people and “taser” is now commonly used as an English for such device and its purpose. With Taser, there is also recurring revenue from the sales of Taser cartridges.
The Use of Force Continuum is a standard that provides law enforcement officers and civilians with guidelines as to how much force may be used against a resisting subject in a given situation. The officers use lethal force because it is reliable — it is most effective to stop a threat. Taser aims to be reliable and effective; minimising the need to use firearms and taking lives.
On January 24, 2023, Axon unveiled TASER 10. It represents a giant leap in innovation,
with several step-function improvements compared to previous versions.
How TASER Energy Weapons Protect Life and Enhance Safety
From Taser, Axon has now expanded to other products around public safety.
The growth of police-worn body cameras has nearly doubled in the past five years and is projected to keep growing. The cameras are a favourite tool of legislators who want to respond to police violence and more transparency. More governments are mandating that police officers wear cameras for greater transparency and accountability. As demand for body cameras grows, demand for digital evidence management grows. Its Tasers and body camera seamlessly send real-time activation and discharge data to the Evidence.com evidence management system. Axon’s suite of products creates a strong integrative and reinforcing network effect.
In December 2022, Axon Enterprise achieved high impact status by the Federal Risk and Authorization Management Program (FedRAMP) Joint Authorization Board (JAB) for its cloud-based Software as a Service (SaaS) solutions. This change will allow Axon’s government customers to store the most sensitive, un-classified data handled by federal civilian agencies.
A video showing its suite of products and how it works together: Axon | Unlock the power of the network
Consistent growth
In the last 10 years, Axon’s revenue and gross profits have been growing at a very consistent compounded annual growth rate of 24% with revenue further accelerating in recent years.
Am increasing percentage of its revenue is recurring as seen from the various metrics.
It has been reinvesting to strengthen and grow. Technology and development costs as a percentage of revenue are maintaining at about 20%. Net cash position is strong and has been increasing. Free cash flow is increasing too. Cash ratio is 161%.
Competitors
While Axon is in a strong leading position in its products, there are several competitors.
| Companies | Market capitalisation as of 3 March 2023 | 2022 revenue , yoy growth and operating margin (OM) | Offerings |
| Axon Enterprise (NASDAQ: AXON) | USD 16.1b | USD 1.19b (+37.8% yoy) OM: 7.8% | Tasers, body cameras, software |
| Motorola Solutions (NYSE: MSI) | USD 44.5b | USD 9.1b (+12% yoy) OM: 18.2% | Body cameras and software |
| Digital Ally (NASDAQ: DGLY) | USD 12.37m | 2021: USD 21.41m OM: -69% | Body cameras and software |
| Wrap Technologies (NASDAQ: WRAP) | USD 84.72m | USD 8.05m (+4%) OM: -220% | Bolawrap (a less-than-lethal suspect restraint system) |
Motorola is taking all the pieces it offers and wrapping them in a similar single, cohesive package, by bundling body cameras, digital evidence management, and cloud-based support and making them cheaper for budget-conscious agencies. Because law enforcement is already familiar with Motorola through many of its existing systems, such as its two-way radios, computer-aided dispatch (CAD), cameras, and records management, the two can readily expand their relationship. Because of its leadership role in CAD, law enforcement agencies would likely feel very comfortable adopting Motorola’s other solutions as one.
Hence, Axon and Motorola are competing to enlarge and strengthen their suite of products and ecosystems. Axon is launching its own CAD system, Air program (drones developed with DJI) and Fleet, a connected in-car camera system.
How big Is the threat Axon Enterprise faces from Motorola Solutions?
Market potential and Axon’s growth initiatives
Market potential
Axon believes the total addressable market is worth $50b and the market potential is still huge.
More government agencies are mandating that their police and enforcement officers wear cameras for greater transparency and accountability. Two years after the murder of George Floyd, President Bident, under his Executive Order to Advance Effective, Accountable Policing and Strengthen Public Safety, ordered all Federal law enforcement agencies to adopt and publicly post body-worn camera policies that mandate the activation of cameras during activities like arrests and searches and provide for the expedited public release of footage following incidents involving serious bodily injury or deaths in custody.
Police Body-Worn Camera Legislation Tracker in the United States
More states in the United States are legislating the use of body cameras for law enforcement though they vary in their implementation. Body cameras also protect security officers from abuse.
In the United States, consumers’ demand for Tasers has been increasing. The pivot started during Coivid-19 when many worked from home and are concerned about personal safety amidst unrest and violence.
Growth initiatives
Below shows their growth initiatives along two axes. The first is expanding our product suite for existing customers. It aims to improve the suite of products to become a leading operating system for public safety. The second axis is diversifying into new markets in US and international markets by both adding new types of customer profiles or users and by adding to our core customer base.
2025 target model
In Q4 2022 Shareholder Letter, it sets a series of goals.
In 2025, it aspires to acheive:
- Revenue of at least $2 billion, reflecting a 20%+ top-line annual growth rate;
- Adjusted EBITDA margins of approximately 25%, representing about 500 basis points of improvement over three years;
- Strong cash generation, with adjusted free cash flow conversion on Adjusted EBITDA of at least 60%, as we continue to invest to support global scale;
- Reduced dilution related to stock-based compensation. We continue to work through already granted equity vesting and exercises which can result in uneven annual levels of dilution, and we are targeting a CAGR for annual dilution of approximately 3% for 2025 and beyond as we work through already granted equity vesting and exercises
Skin in the game
In February 2018, Axon CEO Rick Smith relinquishes his salary for a ten-year performance plan. This was modelled after the 2018 Tesla CEO compensation plan. The performance award consists of a ten-year grant of stock options that vests in 12 tranches. Each of the 12 tranches vests only if a pair of milestones are both met:
- Market cap milestones. For the full vest, Axon’s market cap must increase to $13.5b.
- Financial Performance Milestones. Axon must achieve a set of escalating revenue or adjusted EBITDA targets.
As per Form 10-Q filed for the quarterly period ended December 31, 2022, here is the status of the achievement status of the CEO Performance Award:
The first ten market capitalization goals have been achieved as of December 31, 2022.
In February 2019, its employees were offered to participate in a compensation plan aligned to the same milestones as that of the CEO compensation plan.
Axon’s eXponential Stock Performance Plan (“XSPP”), offered to every eligible employee, is intended to encourage long-term thinking and long-term commitment with an opportunity to earn greater rewards for greater success, albeit with higher risks. It is aimed at retaining and recruiting exceptional talent who have a long-term outlook and motivation to serve and grow the company. The achievement status of the XSPP was also reported in Form 10-Q / 10-K. A total of less than 0.1 million eXponential Stock Units (XSUs) were granted during the year ended December 31, 2022.
While the CEO and employees’ performance plan has been mostly achieved in less than 5 years, it set a culture of alignment in place. The Board will likely put in place another set of performance plans to motivate the CEO and team further.
Things to look out for
Sustaining its growth and improving profits
The sector is niche. Its larger competitor, Motorola Solutions does not provide information for comparison while the other listed competitors are much smaller. We need to pay attention to:
- Revenue growth
- Gross profit margin
- Net profit margin
- Free cash flow
- Net cash position
We also need to monitor the CEO and employees’ performance plans to ensure alignment and for the long-term good of Axon and its shareholders.
Valuation
As of 3 March 2023, it is trading for about 11.26x of 2023 guided sales (13.53x of actual 2022 sales). It has been a consistent performer. The market is getting more bullish with its prospects.
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