There aren't a lot of companies on the market that have the top market share in a rapidly growing business where public policy trends are working in their favor, and that has a high-margin product to top it off. Axon Enterprise (NASDAQ:AXON) is one of those companies, making both less lethal weapons and body cameras that have become a key source of evidence in recent years. 

Despite Axon's rapid growth and improving industry trends, the stock has been stuck in a rut for most of the past three years. But I still love this stock for its long-term potential. 

Officer putting a body camera back on its dock after a shift.

Image source: Axon Enterprise.

On the right side of law enforcement's future

The huge tailwind Axon has is the push both from within and from the public for law enforcement to use body cameras and rely less on guns in favor of less lethal weapons, like tasers. Axon has a leading market position in both categories and is expanding to make its products even more useful. 

A new product called Signal Sidearm, due out later this year, will automatically turn on any body camera within 30 feet when a weapon is drawn so that officers don't have to think about when their body camera is on. Thirty seconds of video is automatically recorded before the camera is turned on, increasing the likelihood of capturing a full incident. 

On the body camera side, Axon is developing a records management system that will help make recording an incident and interviewing witnesses easier, more accurate, and less time-consuming. This could help reduce paperwork for officers and keep them on the streets for more hours in a shift. 

All of these products help engrain Axon into the everyday life of law enforcement., the cloud service that's used to offload data at the end of a shift, is also used by prosecutors to gather evidence and make a case. It's a complete system that every major touch point in the legal system uses, and it will be very difficult for a law enforcement agency to drop Axon for another competitor once the system is in use. The business is extremely sticky long term, and very high margin as well. 

Making a business of body cameras

Axon doesn't make money in the body camera business by selling body cameras themselves. In fact, second-quarter product sales in the body camera segment held a negative gross margin of 1.7%. But service sales, which include and other added services, had a gross margin of 70%. And the segment grew 161% year over year. 

It's a little like the razor/razor blade model. Axon won't make much, or any, money from selling body cameras to officers, but it will make a lot of money selling associated services that are required to maximize the value of those body cameras. And it's those services that will become ingrained in the everyday lives of law enforcement, building on the stickiness of the business model. 

A business built to last

I think Axon has a business with a lot of macro tailwinds as more law enforcement agencies around the world move to tasers and body cameras, but it's the services behind that I'm really interested in. The company has built its products and services to be very sticky to customers, and the ecosystem is growing rapidly around the world. If customers who sign a 5-year contract today become customers for 20 or 30 years, the short-term cost of added sales and R&D staff will more than pay off through years of high-margin service revenue. 

As adoption rises and more services are rolled out, Axon is in a great position to profitably grow its business in law enforcement. And that's the kind of stock I love. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.