Axon Enterprise Inc. (NASDAQ:AAXN) as a company has been on a tear over the last five years, driven lately by growth in its Taser stun guns and development of the body camera segment. But as far as the stock is concerned, the performance hasn't been quite as impressive. 

Shares of Axon are essentially flat for the year and don't seem to enjoy the kind of investor excitement that one might expect from a growth stock. But there could be a good reason behind that. The stock's tepid performance could be a result of a move the market may not like, but long-term investors should love. 

An officer with a body camera talking to a citizen.

Image source: Axon Enterprise Inc.

The giveaway that could cost Axon millions

On April 5, Axon announced an offer for free body cameras for every police officer in the U.S. Even accounting for the fact that it was effectively an offer for officers who didn't already have an Axon body camera, it still amounts to a promise for a free product for around 1 million officers across the country. 

Not only will officers who accept this offer get a body camera, they'll also get a year of the unlimited pro licence to store data on, two mounts, a docking station, and access to the Axon online training library. 

This giveaway has important short-term implications: Due to the high cost of the offer, revenue growth at Axon will likely not result in profits. In fact, if a lot of officers take advantage of the offer, the company could experience financial losses within the next year. 

AAXN Revenue (TTM) Chart

AAXN Revenue (TTM) data by YCharts.

If you're looking at Axon as a short-term investment, this free-camera offer is terrible because it means profitability will be delayed, even if a lot more officers start using body cameras. However, the long-term story is much more favorable. 

Why bad news short-term could be great news long-term

To understand why Axon would offer a free body camera in the first place, we have to look at where the company makes its money. Axon is trying to get customers to buy a subscription to a suite of services that include the evidence management system and a body camera upgrade every two and a half years, and future add-ons like artificial intelligence and improved wireless services. In the first quarter of 2017, this services segment that includes subscriptions had a gross margin of 70.2%, which is a level usually seen at technology companies, not product suppliers. 

The beauty of the entire platform is that once a law enforcement agency and prosecutors begin using Axon's products, they'll likely be locked in. Video from body cameras can be used by prosecutors, while new technology allows officers to reduce paperwork by using body camera software. It would not be feasible to switch systems every year, because training costs would be high, so customers would renew their Axon subscriptions year after year. 

Axon benefits the most when it can win long-term customers. And the value of a customer that buys a $79-per-month subscription service over many years at a 70% margin is well worth the price of the one-year trial -- even if the free trial reduces net income in the near term. 

Bad stock performance for the right reasons

The worst thing Axon has done for its stock price over the past year is the free body camera giveaway, which will likely reduce near-term earnings -- something the market can be very focused on. But long-term this was likely the right move. If Axon can lock customers into a high-margin business for years to come, the price of the free trial will have been worth it. Long-term investors should actually love the reason the stock hasn't had a great year in 2017 -- because the move should pay off in the end.