We're Calling Up This Bullpen Name Ahead of Tonight’s Earnings Report
We’ll start small and build up the position over time.
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| Symbol | Transaction Type | # Shares Traded | Recent Price $ | Shares Owned After Trade | % Portfolio |
|---|---|---|---|---|---|
AXON | Buy | 100 | 497 | 100 | 1.0 |
After you receive this Alert, we will buy 100 shares of Axon Enterprise AXON at or near $497. We're calling up this name from TheStreet Pro Portfolio Bullpen, and following this trade, AXON shares will account for 1.0% of the portfolio’s assets.
We’re no stranger to taking advantage of oversold shares. Yesterday, we used the combination of Eaton ETN shares being oversold and rising electric utility capital spending plans to scoop up additional shares for the portfolio.
We are doing so again today by adding shares of Axon Enterprise following their more than 30% drop in the last week. Such a drop has likely washed out momentum investors and suggests that should Axon deliver better-than-feared quarterly results and guidance after tonight’s market close, we could see a quick pop in the stock.
Ahead of that report, we are establishing a $600 price target for AXON and a $425 panic point. Based on the company’s backlog and deferred revenue figures as well as margin profile, we will revisit those figures as needed.
The pressure on AXON shares over the last few trading sessions followed Trump administration headlines on budget cuts. However, recently Axon competitor Motorola Solutions MSI reported consensus-topping December-quarter results with record backlog levels and guidance for the current quarter that topped market forecasts. Digging into those results, Motorola cited strong demand for video and cloud solutions as well as high interest in AI-enabled ones. The management team also shared that it has not seen any changes in customer behavior.
Those comments from Motorola play very nicely into the shift in Axon’s business toward higher-margin, recurring revenue streams. Similar to what we’re seeing at ServiceNow NOW and Elastic ESTC, favorable pricing with AI solutions should have a positive impact on revenue and margins. While adoption of tasers and body cameras is the driver behind Axon’s hardware business, the growing hardware install base is the force behind the company's software and services business, which carries far larger gross margins of 73%-74% compared to 52%-55% for the hardware business.
That mix shift was one of the key factors behind our rationale for previously owning Axon in the TheStreet Pro Portfolio, and we continue to like that, especially as services become a larger part of the overall revenue stream. We also continue to like the adoption of its taser and body camera products, but it’s the expanding margin profile fueled by the business mix shift that has us more interested in being shareholder of the company.
For the first nine months of 2024, the services segment contributed just over 50% of total gross profit, up from 44.5% for the same period in 2023. As that mix shift continues, it should expand overall margins, benefiting EPS prospects. We see this being similar to Apple’s AAPL growing and higher-margin Service business that helps reduce its reliance on iPhone. And it may surprise you to learn that the percentage of gross profit derived by Axon’s services segment (50%) is greater than the 2024 figure of 40% figure for Apple.
We are also seeing some movement on allowing federal grant programs to allow first responders to use federal funds to invest in drone technology. Those efforts have been endorsed by the Federal Law Enforcement Officers Association, the National Fraternal Order of Police, the Major County Sheriffs of America, and more recently industry group AUVSI. To date, drones have been a relatively small part of Axon’s revenue stream, but following its 2024 acquisition of Dedrone, it builds on its relationship with Skydio. Passage of such spending approval would be a boon for Axon’s drone efforts and also feed its services business. And as we know, Trump advisor Elon Musk is pro-drone usage.
Our Plan for Axon Shares
Recognizing the company’s quarterly earnings report comes after today’s market close, we are starting the position with a modest 1.0% stake in the portfolio’s assets. This will at least give us some skin in the game should Axon deliver another consensus-topping quarter and upbeat outlook. At the same time, it will also give us ample room to build up the position at better prices should there be some chink in the company’s results and guidance.
Arguably, with the shares already in oversold territory, the probability of a severe negative reaction is lessened. With that in mind, we will be keeping a close watch on AXON's 200-day moving average, which clocks in near $447. That implies potential downside of around 8% from current levels, but measured against potential upside of near 22% the net upside of almost 15% is enough to warrant a small starting position and a Two rating.
(Please note that we are looking to execute these trades at or near the share price mentioned above. Once the trade is completed, subscribers can see the trade's executed price here. Be sure to toggle the chart to sort by Purchase Date.)
At the time of publication, TheStreet Pro Portfolio was long ETN, NOW and ESTC.
