Axon Enterprise (NASDAQ: AXON) has been a big winner on Wall Street over the past decade thanks to the company's ability to consistently beat expectations. News of Axon's latest results sent a spark through the markets, sending Axon shares up 21.7% in August, according to data provided by S&P Global Market Intelligence.
A stunning quarter
Axon provides hardware and software primarily to law enforcement agencies. The company traces its origins back to the Taser stun gun, but in recent years has added a range of products, including body cameras and evidence management software, that it can cross-sell to its stun gun customers.
It has been a winning formula. In August, Axon reported quarterly revenue up 35% year over year, driven by a 47% jump in cloud (or software) sales and a 28% increase in Taser revenue. The quarter marked a milestone for the company, as it was the first time cloud revenue, at $195 million, basically matched the $197 million in hardware sales.
That's important for investors because the cloud business is more profitable. The unit posted a 72.4% gross margin for the quarter.
At the quarter's end, Axon had $7.3 billion in future contracted revenue, up from $5.2 billion at the same time last year. That backlog of future business provides investors with some clarity into future growth.
Is Axon stock a buy?
The company didn't just beat expectations for the most recent quarter; it also raised its full-year outlook. Axon now expects to generate $2 billion to $2.05 billion in sales in 2024, up from $1.94 billion to $1.99 billion. Even at its low end, the guidance is well above Wall Street's $1.98 billion consensus estimate. And at its midpoint, Axon would report 29.5% year-over-year growth.
All evidence suggests that the momentum can continue. However, there are a few things investors should note before buying in. For one, Axon shares are expensive, trading at more than 70 times future earnings. Wall Street has already priced in a lot of that future growth, and any small issue in the quarters to come could have an oversized impact on the stock.
Second, stock-based compensation rose from $32 million to $75 million in the quarter. The company is doing well, and employees deserve to be rewarded, but investors will want to watch that figure carefully to make sure the spoils are also shared with stockholders.
There is a lot to like about Axon. But given its valuation, new investors might want to consider dollar-cost averaging instead of rushing in and buying a big stake at today's prices.
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Lou Whiteman has positions in Axon Enterprise. The Motley Fool has positions in and recommends Axon Enterprise. The Motley Fool has a disclosure policy.
