Shares of Axon Enterprise, Inc. AXON have been showing impressive gains of late, hovering at more than $630 per share in the past five trading sessions. The stock closed at $669.87 on Tuesday, just 0.8% below its 52-week high of $675.47.
Year to date, the stock has surged 160.2%, outpacing the industry and the S&P 500 composite’s growth of 50.2% and 27.1%, respectively. The company has also outperformed other industry players like Allegion plc ALLE and Alarm.com Holdings, Inc. ALRM, which have returned 11% and 2.3%, respectively, over the same time frame.
Axon Outperforms Industry & S&P 500
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The stock is also trading above both its 50-day and 200-day moving averages, indicating solid upward momentum and price stability. This reflects a positive market sentiment and confidence in the company's financial health and long-term prospects.
AXON Shares Trading Above 50-Day and 200-Day SMA
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Factors Favoring the Company
Axon’s TASER segment is thriving on the back of strong demand for TASER devices. Stable demand for virtual reality training services also supports the segment’s growth. Segmental revenues increased 32.1% year over year in the first nine months of 2024. The company continues to witness growing popularity for its next generation TASER 10 products, whose shipment began in first-quarter 2023. Also, growth in cartridge revenues, driven by higher adoption of the TASER products, has been driving the segment’s performance.
The addition of new users and associated devices to the Axon network is aiding the Software & Sensors segment. After witnessing a year-over-year 44% jump in revenues in 2023, revenues from the segment increased 34.2% in the first nine months of 2024. An increase in the aggregate number of users and average revenue per user, driven by increased adoption of software applications, is also driving Axon Evidence and cloud services’ growth within the segment.
Axon introduced its next-generation body-worn camera, Axon Body 4, in April 2023. With upgraded features such as a bi-directional communications facility and a point-of-view camera module option, this body camera is generating significant demand, thus bolstering the segment’s growth.
Axon’s investments in newer areas within the software business, like AI products, real-time operations, drones and robotics, bode well for its growth. This, along with the strength in the newly introduced TASER 10 device, led it to provide bullish guidance for 2024. The company expects revenues to be approximately $2.07 billion compared with $2.00-$2.05 billion guided earlier. The metric indicates approximately 32% year-over-year growth.
AXON remains focused on strategic collaborations with other companies to expand its product offerings and customer base. In June 2024, the company entered into a partnership with Skydio (a leading U.S. drone manufacturer) to introduce a comprehensive line of drones in public safety that includes a scalable Drone as First Responder (DFR) solution. The combined offering will support Axon’s DFR programs across its customer base and strengthen its market position in this category.
Better-Than-Industry Returns
Axon’s trailing 12-month return on equity (ROE) is indicative of its growth potential. ROE for the trailing 12 months is 20.42%, higher than the industry’s 18.06%. This reflects the company’s efficient usage of shareholder funds.
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Return on assets is 10.29%, also ahead of the industry’s 4.67%, indicating that the company has been utilizing its assets efficiently to generate returns.
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Earnings Estimate Revision
Earnings estimates for Axon have been going up, reflecting analysts’ optimism. The Zacks Consensus Estimate for 2024 earnings is pegged at $5.29 per share, indicating an increase of 9.3% over the past 60 days. The figure also indicates year-over-year growth of 27.8%.
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Risks to Consider Before Choosing AXON
Despite the aforementioned growth opportunities, Axon faces certain challenges that one should consider before investing in this stock.
The company has been coping with the adverse impacts of high operating costs due to business integration activities, higher wages and stock-based compensation expenses. In 2023, the cost of sales soared 31.8% year over year. Also, in the first nine months of 2024, the metric climbed 39.4%. The metric, as a percentage of sales, was 40.6%, up 180 basis points year over year.
The increase in operating expenses has been adversely impacting the company’s margins of late. In the first nine months of 2024, Axon’s gross margin declined 170 basis points year over year. Despite recent signs of easing, lingering supply-chain disruptions could impede the company’s growth.
Stretched Valuation Remains an Overhang
AXON’s lofty valuation remains a concern. The stock is trading at a forward 12-month price-to-earnings (P/E) ratio of 104.92X, much higher than the industry average of 33.24X. This elevated valuation could make the stock vulnerable to further pullbacks if market sentiment sours. Also, the stock is overvalued compared with its peer, MSA Safety Incorporated MSA, which is trading at 21.67X.
Final Thoughts on AXON
Given the strength across its businesses, solid earnings estimates and robust share price returns, maintaining a position in Axon appears to be the right choice. Escalating operating expenses, margin pressures and premium valuation are limiting this Zacks Rank #3 (Hold) company’s near-term prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
While current shareholders should hold their positions, new investors should wait for the stock to retract some of its recent gains and provide a better entry point.
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Free: See Our Top Stock And 4 Runners UpAllegion PLC (ALLE) : Free Stock Analysis Report
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Alarm.com Holdings, Inc. (ALRM) : Free Stock Analysis Report
Axon Enterprise, Inc (AXON) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
