Hold Axon Amid Macro Challenges, High Valuation

seekingalpha11-21

Axon Enterprise has promising AI-powered products like Draft One, Drone as First Responder, and Fusus which are expected to drive long-term growth.Macro challenges include municipal budget constraints...

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(NASDAQ:AXON) has a bright future, as the firm has multiple, strong, potential, positive catalysts, while the company's rapid growth show that its offerings are resonating with its customer base. Nevertheless, with Axon facing two important macro headwinds and the valuation of AXON stock at very high levels, I give the name a hold rating at this point. Axon's Strong, Positive, Potential AI Catalysts Axon has launched multiple AI-powered products this year, including its Draft One report-writing offering, its Drone as a First Responder system, and its Fusus product. These products should be appealing to many of Axon's current customers. Consequently, I expect them to help enable them to cause the company's growth to accelerate over the longer term. Introduced in April 2024, Draft One, according to Axon, utilizes AI to enable police departments to write reports significantly more quickly than without the technology. Specifically, Axon found that Draft One reduced the time that officers spend on paperwork by about one hour per week. As a result, the system should enable police departments to hire fewer officers, saving jurisdictions significant amounts of money. Moreover, the system works in tandem with the company's body cameras, automatically transcribing the audio that they record. Consequently, it will be difficult if not impossible for other firms to provide a similar system to the many jurisdictions whose police departments are already utilizing Axon's body cameras. The Federal Aviation Administration has reportedly found that the number of drones used by public safety agencies is expected to reach over 30,000 in 2025, up from just 10,000 in 2020. Axon reports that \"There are approximately 1,400 police departments in the United States using drones,\" while \"that number is expected to skyrocket in the coming years as drones become more accessible and more capable.\" In light of the apparent large, rapidly growing interest in police and other public safety agencies in using drones, I expect the company's AI-powered Drone as a First Responder system to gain significant traction. The system \"allows agencies to deploy remotely piloted drones to emergency calls, often arriving before ground units and providing real-time situational awareness,\" Axon explained. Importantly, the company's drones enable officers to see what's happening on the ground, allowing them to decide whether to rush more officers to the scene on the ground. Additionally, the drones have \"deconfliction\" capabilities, suggesting that they can defuse violent situations. Also, importantly, the fact that many public safety agencies already use Axon's products and presumably trust the firm should enable the company to be able to sell a significant number of its drones to these agencies over the longer term. Finally, the company's Fusus system, acquired by Axon in February, aggregates multiple video sources and utilizes AI to provide \"automating detection capabilities.\" It also triggers alerts when certain search criteria are met. Public safety departments are likely to be interested in acquiring Fusus in order to please their political superiors by reducing response times and apprehending criminals more quickly. Axon's Macro Challenges In April, CNBC reported that \"Municipal governments across the United States are looking to rein in spending as pandemic-era stimulus dries up and inflation lingers for longer than expected. \" Moreover, many municipalities are spending significant amounts of money on housing and providing other services, including schooling, for migrants and their families. Also, noteworthy is that, unlike Democrats, Washington Republicans have not shown much inclination in the last 15 years to provide states with huge amounts of funds in order to deal with their fiscal issues. Indeed, President-elect Trump has even been reluctant to provide disaster aid to states in the past. In light of these points, as well as the incoming Trump administration's strong desire to reduce the deficit and enact more tax cuts, I doubt whether it will look to meaningfully help states and cities with their fiscal issues. And with financially strapped states and cities unlikely to obtain much additional aid from Washington, they probably will not look to spend much on new initiatives, including Axon's offerings. Consequently, the company may have difficulty selling its products going forward. Additionally, since 2021, concerns about police departments unjustifiably killing Black men appear to have faded, in my opinion, from headlines and no longer seem to be one of urban leaders' top concerns. I consume a great deal of news from both sides of the political spectrum, I can't recall the last time this issue was raised as a key problem facing the U.S. Although many Americans still care passionately about this issue, I believe that it is much less prominent in U.S. media and consciousness than was the case three or four years ago. The combination of the latter point, along with many cities' difficult financial situations, may cause Axon's growth to decelerate in the medium term. That's because one of its main products is the Taser whose main selling point is the fact that it's much less lethal than bullets. Axon's Rapid Growth and High Profits In the third quarter, the company's sales jumped 31.6% versus the same period a year earlier to $544.27 million, while its operating cash flow surged 45% year-over-year to $91 million. Also, noteworthy is that, in the 12 months that ended in September, its top line climbed to $1.94 billion versus $1.81 billion during the same period a year earlier. On the other hand, its net income during the 12 months that ended in September only increased to $297.4 million, from $291.5 million in the same period a year earlier, suggesting that it may already be encountering some downward pressure on its profits due to the macro pressures that I outlined. Axon's Elevated Valuation and Risks to My Thesis AXON stock has a huge forward price-to-earnings ratio of 175 times, well above the aerospace and defense media forward P/E ratio of 23.8 times. Moreover, its forward PEG ratio of 5.59 times is well above the sector median of 1.94. The PEG ratio takes into account future growth prospects. The shares can perform better than I anticipate if economic growth sharply accelerates, providing states and cities with significantly higher tax receipts. Additionally, a tragic incident could cause cities to once again focus more intently on deaths caused by police officers' misconduct. And municipalities' budget cuts could spur them to buy more of Axon's products in the short-to-medium term in order to save funds in the longer term. That's because some of the company's products, including its drones and its Draft One offering, could enable police departments to hire fewer officers in the long run, reducing municipalities' salary and benefits costs. AXON stock may perform worse than I expect if the economy decelerates or if cities' expenses associated with migrants continue to rise a great deal despite Trump becoming president. The Bottom Line on AXON Stock  Investors who already own Axon's shares should hold on to them because they will probably drop in the medium term but rise further over the long term. Investors who don't already own them should wait for a likely better entry point in the medium term.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485875175"}