We're Setting Our Sights Higher for Our Newest Portfolio Win
Here's why we're boosting our price target for this security-related stock.
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We are lifting our price target on Axon Enterprise AXON shares, our latest position in the Portfolio, to $625 from $600. But following the sharp post-earnings reaction, we are maintaining our "Two" rating at least for now. We will lift our panic point to $480 from $425.
The catalyst for this move was last night’s blowout quarterly earnings report, but more so, the forward view that is supported by the step-up in deferred revenue and further margin expansion prospects. For Axon, the higher margin services business continues to become a larger part of the revenue mix. It’s the benefit of that continued mix shift and the corresponding impact on Axon’s bottom line that we aim to capture by owning the shares.
As for the quarter, Axon’s earnings per share of $2.08 simply crushed the $1.40 market consensus. Revenue for the quarter of $575.1 million, up almost 36% year over year, topped the market forecast of $566 million, too. The primary driver of the bottom-line performance was the improvement in margins. Examining the composition of the quarter’s revenue, we can easily see that margin improvement ties back to the service business, which accounted for more than 42% of revenue in the quarter, up from 39.8% in the September 2024 quarter and just over 40% in the December 2023 one. As a reminder, gross margins for Axon’s service business are in the mid-70% area, 20-plus points higher than the products business.
Axon continues to benefit from the adoption of Taser and body cameras across the domestic and international landscapes. What we like more is the company’s ability to drive service business growth on top of this by building on its cloud offering, including artificial intelligence solutions such as Draft One, real-time translation, and other offerings that drive revenue per user higher. We also like the continued step up in annual recurring revenue, which crossed $1 billion exiting the December quarter compared to $732 million entering 2024. That bodes extremely well for the services business becoming a larger part of the revenue mix.
When we look at the company’s outlook for 2025, revenue guidance of $2.55 billion to 2.65 billion, up around 25% year over year, is above the $2.56 billion market forecast. But, we would argue, its adjusted earnings before interest, taxes, depreciation, and amortization guidance is the item to focus on. Management sees that hitting $640 million to $670 million, which implies margins of 24%-26% compared to 25% achieved in 2024. Here’s the thing, as the service business has grown from just under 33% of Axon’s total revenue in 2022 to just over 41% in 2024, its adjusted EBITDA margins have risen to 25.0% last year from 19.5% in 2022. This suggests that as the services segment continues to become a larger piece of the revenue pie from 42.6% in 2024, management’s adjusted EBITDA margin guidance is likely to prove conservative.
Axon management will be presenting at the Morgan Stanley TMT conference on Monday, March 3, and we expect an upbeat presentation. We will be listening for insights about international Service revenue prospects and more comments relating to Axon’s drone and AI prospects.
