Many law enforcement agencies around the world are just starting to adopt body cameras that capture the interactions of officers for use in court. Axon Enterprise (NASDAQ:AAXN) has built a dominant position in the industry, and there's a lot to like about the business long-term

But I think the market is underappreciating how much growth and profitability Axon could have ahead of it. Here's why the business model is just getting revved up. 

Axon's headquarters with a cloudy sky in the background.

Image source: Axon Enterprise.

The recurring revenue model is just gearing up

The hope for Axon is that law enforcement agencies will sign long-term contracts for hardware and services that end up being recurring revenue. For tasers, that means a program that charges a monthly fee regularly upgrading tasers and even unlimited cartridges. Body camera financing options are similar with hardware renewables every year, but monthly subscriptions to the cloud service are the real moneymaker. And these business models are just beginning to tap into their potential. 

According to Axon management, body cameras and related services are potentially a $1 billion business in the U.S. alone. About 600,000 officers are on patrol in the U.S., and there are over 2 million officers and vehicles worldwide that could use Axon products and services. Of that, only 169,000 officers currently have an Axon body camera service license. 

You can see below that future contracted revenue has been growing rapidly over the past two-and-a-half years as the body camera service contract model gains traction. 

Chart showing future contracted revenue growth from Q1 2015 to Q2 2017.

Image source: Axon investor presentation.

If body camera adoption continues to grow, it will also lead to rapidly improving financials for Axon. 

Body cameras are currently a financial drain

It's easy to say that a company is foregoing profits today to invest in the future, but in Axon's case, it's true. In the table below, you can see that Axon is spending 68% of revenue on selling, general, and administrative (SG&A) expenses and 38% on research and development (R&D) in body cameras. As the revenue growth I described above gears up, those figures should be closer to 25% and 15%, leaving a 20% operating margin. 

Model showing Axon's margin profile for body cameras.

Image source: Axon investor presentation.

If body cameras do become a $1 billion business as management hopes, the company could be making $200 million in operating profit for that segment alone. That's not bad for a company currently worth $1.2 billion. 

A lot of growth ahead

Last year, Axon's weapons sales were $202.6 million; 33% of that revenue is now recurring in nature. Body camera revenue was just $65.6 million but grew 84.7% from a year earlier. If the body camera market is indeed a $1 billion business and operating margin is near 20%, we should see profitability rise rapidly as well. 

It's tough to project just how profitable Axon could be when the body camera business reaches maturity, but I don't think it's out of the question to see this be a company with over $1 billion in annual contracted revenue and net income of well over $200 million when both body cameras and weapons are included. That could make this $1.2 billion company a great stock to own long-term.