On a day when it seemed like just about every stock on the planet was "in the red," and lost money, TASER International (NASDAQ:TASR) was the exception.
News that TASER has gotten its stock included into the S&P 600 SmallCap Index sent TASER shares flying in early trading Monday. Although TASER stock wasn't completely immune to a broad market sell-off, and ended the day with only a 5.2% gain, the stock was up nearly twice that amount at one point.
But is TASER really worth the nearly $17 a share that Wall Street now charges for it?
Well, no. But it's awfully close.
On the surface, TASER shares seem steeply valued at 52 times earnings. Even if analysts are right about the company's ability to grow earnings at 30% annually, every year, for the next five years, that looks like a pretty rich valuation. But looks can be deceiving.
TASER, you see, may report GAAP financials showing that it earned only $16.7 million over the past year. But the company's cash flow statement shows that TASER generated real cash profits nearly 50% higher -- $24.7 million.
When you factor in the company's cash-rich balance sheet, which shows TASER sitting on $44 million in cash, with no debt to speak of, TASER winds up with an enterprise value-to-free cash flow ratio of just 32. That's almost cheap enough to be worth buying, given the company's 30% growth rate.
The business matters, too
The big question, of course, is whether TASER can grow at 30%. After all, TASER grew at "only" 25% over the past five years. As a general rule, companies tend to slow as they age -- not speed up. So expecting TASER to grow faster over its next five years than it did over its last five, requires quite a leap of faith.
Yet it's a justifiable leap. Over just the past few months, this company's business model has changed significantly, and it's done so for the better.
Recently, TASER introduced a new product called the AXON on-body camera. CEO Rick Smith thinks that AXON cameras, paired with TASER's EVIDENCE.com video evidence storage service, "will become standard equipment [with police forces] within the next 5-10 years." Already, Smith says TASER is "approaching a tipping point where the deployment of both body-worn video [is] moving beyond early adopters into the mainstream of policing."
Going forward, therefore, TASER will rely less and less selling new $1,000 stunguns to grow its business, and more and more on its AXON/EVIDENCE products -- which cost only $300 to $500 apiece to start, then generate $10 per month in recurring revenues for the company, for as long as a constable keeps using the product. Extrapolating that out, EVIDENCE revenues should equal or exceed the value of an entirely new camera every four years -- automatically (and with the added benefit of not having to build and sell a camera to win the revenues).
That's a very nice way to grow a business, and the single best reason I know of, for believing that TASER can achieve 30% growth.
Winners invest for the long-term
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Rich Smith and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.