Upgrading This Holding as Setup Offers Shades of Palantir
We’ll focus on these key metrics as AI adoption and customer penetration grows.
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We’ve had some questions from members about the recent volatility in Axon Enterprise AXON shares leading up to Tuesday night’s management presentation at the Goldman Sachs Communacopia & Technology Conference.
While not much new ground was broken during the presentation, it was a solid reminder of the mix shift unfolding at Axon toward the higher margin software and services segment, the one that also houses its AI efforts. After having pulled back from the recent high near $875, and with the shares hugging the 100-day moving average near $739, the presentation is a solid reminder of why we are long AXON shares. We see this very much like the recent setup in Palantir PLTR shares, which have started to move off their 50-day moving average.
Folks who are underweight the shares relative to the Portfolio may want to take note as we upgrade AXON shares to a One rating.
When Axon reports its September quarter, based on the strength we see in bookings and the outlook for its revenue mix between hardware and software, we’ll revisit our current $860 price target as needed. Near-term, if AXON shares climb much past $775, we may be inclined to revisit that new One rating.
The Presentation
During the 30-minute or so presentation that kicked off well into the evening on Tuesday night, Brittany Bagley, the company’s COO and CFO, shared that Axon is seeing success with its bundle of AI services referred to as the "AI Era Plan."
Currently, that bundle includes Draft One, Policy Chat and Real-Time Translation, and is a push to drive productivity. Bagley also alluded to Axon continuing to capture greater budget dollars from existing customers as the company continues to expand its offerings to include Taser, replacement cartridges, body cameras, drones, counter drones and software/cloud services.
Bagley shared that the company is seeing new products and services translate into bookings, and on the question of Axon’s penetration in the federal and enterprise markets, she shared that there is ample runway. The same comment applies to drones and the international market.
Yet, there is room to grow further in its core U.S. public safety market. For most of Axon’s police departments, Bagley shared that Axon is running around 1% of their budgets, while for the departments that are taking the entire Axon enchilada of hardware and services, it’s closer to 4% to 5%. What this tells us is that if Axon can raise that average to 2% of budgets in the U.S. and just achieve much more modest gains in enterprise and international, the company’s annual recurring revenue will be much larger than the $1.2 billion it was exiting the June quarter. That’s the opportunity, and one we’ll track based on reported bookings and future contracted bookings (FCB). Exiting the June quarter, FCB stood at $10.7 billion.
While AI and drones tend to get most of the attention these days, Bagley pointed out that we are in year three of a five-year Taser refresh cycle, and the body camera business refresh is running about 2.5 years. That suggests that as AI and drones mature, new product cycles for those hardware products will begin. That would offer both a fresh bundling and pricing opportunity and could translate into better margins ahead as product development spending this year and next normalizes.
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At the time of publication, TheStreet Pro Portfolio was long AXON and PLTR.
