This Holding Is Addressing Key Pain Points as We Increase Our Position

Don't Jump the Gun With Axon Enterprise

In addition to the Portfolio picking up more shares of Axon (AXON) on Wednesday, there were a few other drivers other than the post-ceasefire news pop that led the market higher and pulled AXON shares with it.

Those drivers were a combination of Wall Street Buy rating reiterations and the initial days of Axon’s annual Axon Week event that runs through Friday, April 10. The event tends to be a showcase for Axon’s products and services, complete with new introductions, just like similar events held by Apple (AAPL) , Google (GOOGL) Meta (META) and others.

Working backward, the keynote note address highlighted three new AI products from Axon.

Axon Vision: This offering uses AI to recognize critical activity in live video as it happens, helping operators cut through overwhelming volumes of footage and home in on what matters most. When an alert appears, operators can verify what's happening using nearby cameras and determine the appropriate response.
Axon Assistant: First introduced on Axon’s body cameras, Axon Assistant has been expanded across Axon’s ecosystem and leverages AI models to provide secure, FBI Criminal Justice Information Services (CJIS) Security Policy-compliant access to data on Axon Evidence and the Axon App on mobile devices.
Axon 911: Following the acquisitions of Prepared and Carbyne, Axon 911 brings cloud-based infrastructure that sets the foundation for an AI-enabled center and helps redefine how 911 centers operate

What we see a few things in these announcements.

First, Axon is leveraging technology and connectivity to address the productivity pain point in public safety and other end markets. We’ve discussed police shortage issues before, but as a reminder, police agencies are reporting operating near 90% of authorized staffing levels, with the recruiting pipeline down 27% to 60% in some parts of the country.

Second, Axon is leveraging AI models as part of its hardware-services solution set, which collects unique data. In our view that addresses market-related concerns over AI-related disruption.

Third, this moves Axon into more value-added services, one that builds on the company’s existing relationships, and should help it capture more addressable market dollars when renegotiating customer contracts. That should help build its multi-year future contracted bookings over time, and as you know, that is a key barometer for us and Axon’s visibility.

We are not alone in that thinking, and that brings us to Morgan Stanley, Goldman Sachs and TD Cowen reiterating their Buy or equivalent ratings. One comment that from Goldman that stood out to us and speaks to some of the recent pressure on AXON shares was that it adjusted it price target lower to reflect “industry-wide multiple compression across software companies.”

As we pointed out above, Axon is a hardware and services company, not too different from Apple, even though Axon’s revenue and gross profit exposure to its Software and Services segment is larger than that at Apple. The point is that Axon is not just a software company, and that is hammered home with the fact that 46% of its gross profit dollars come from its hardware/connected device segment. This speaks to the nature of Wall Street analyst coverage and how, from time to time, companies get slotted in industry verticals that aren’t always a perfect match.

That misperception, when it happens, can be helpful to those of us who understand a company’s underlying business model. And while we expect Axon’s Software and Services to become a larger part of the overall business mix, labeling it as “just a software company” is a long, long way off.

Given Axon’s work in other camera solutions, drones, and other hardware products, including a new, smaller body camera for the retail and healthcare markets, it’s fair to think that day may never come.

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At the time of publication, TheStreet Pro Portfolio was long AAPL, AXON, GOOGL and META.