Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Taser and body camera maker Axon Enterprise (NASDAQ:AAXN) has been a phenomenal performer for shareholders. Up nearly seven times in value over the past five years, Axon stock has more than doubled already this year alone, helped by booming sales of both Taser stun guns (unit sales up 13% in the last 12 months) and even better sales of body cameras (up 24%).

But with a market capitalization that is now approaching 300 times trailing earnings, is there any more room left for Axon Enterprise to run? This morning, analysts at investment megabanker JPMorgan weighed in, saying they expect Axon shares to take a "breather." Great as the business is going, Axon stock, argues JPMorgan, has come too far, too fast, and could remain "range-bound" for the foreseeable future as a consequence. As a result, the analyst is downgrading Axon to neutral, but keeping its target price at $66 per share.

Here's what you need to know.

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Image source: Getty Images.

Coming not to bury Axon, but to praise it

This is not to say JPMorgan does not like Axon -- far from it. In today's downgrade, covered on StreetInsider.com (subscription required), JPMorgan reiterates its confidence in "AAXN's uniquely strong position in a large addressable market, solid growth momentum, and improving business model." After all, JPMorgan had an overweight rating on Axon up until now.

Most analysts expect Axon to parlay these strengths into above-average 27.5% annualized profits growth over the next five years. JPMorgan believes it's possible Axon will exceed even that high estimate (although it doesn't say by how much).

Well, maybe bury it just a little

And yet, with a trailing P/E ratio of 287 (according to data from S&P Global Market Intelligence), Axon would have to grow incredibly fast to get its PEG ratio down anywhere near the value investor's touchstone of 1.

Hence JPMorgan's conclusion: Although investors who already own the stock should should keep their positions, "we expect the stock to be somewhat range-bound near term following the strong outperformance YTD."

How should investors react?

Investors are taking JPMorgan's advice to heart, and selling off Axon stock by more than 5% this morning. But is that the right call?

From a valuation perspective, it sure looks right. Even with an earnings growth rate approaching 30% a year, Axon stock is clearly overpriced at a P/E ratio roughly 10 times that growth rate (i.e., a PEG ratio of nearly 10). And yet, there are some factors that don't get captured in that PEG ratio.

Cash, for one thing. As data from S&P Global reveal, Axon generated more than $34 million in positive free cash flow over the past year, or 2.5 times more real cash profit than is reflected in the company's $13.6 million in trailing net income. And with cash flowing into the company so strongly, Axon has built up an admirably strong balance sheet featuring nearly $100 million in cash on hand, without a lick of debt.

Factoring that cash into the picture, Axon stock that sells for 287 times earnings can just as accurately be described as selling for an enterprise value of only 111 times its trailing free cash flow -- still a very high multiple, but less than half as expensive as the company's P/E ratio makes it look.

There are also the moves Axon is making to juice its growth rate. Over just the past week, for example, Axon has announced a partnership with "world-leading open platform IP video management software provider" Milestone Systems that will facilitate use of Axon software to analyze video data from "more than 6,000 models of cameras from 150 manufacturers, including CCTV footage," in addition to footage from Axon's own body cameras, multiplying the usefulness of Axon's technology to its police department partners.

Axon also announced a partnership with DJI, the world leader in civilian drone manufacture, to sell drones linked to Axon's own Evidence.com video data management software to police departments under a new program it's calling "Axon Air." Axon says that "more than 900 American public safety agencies use drones" in their operations today. That sounds like a lot, but it's still a small fraction of the roughly 18,000 state and local law enforcement agencies that Axon targets with its other products -- a huge market into which Axon can continue to sell products and services over time.

How big is the opportunity for Axon, offered by these and other initiatives it will announce in the future? Is it big enough to justify a 287 times multiple to earnings, or even a 111 times multiple to free cash flow?

I don't know the answer to that -- and to be honest, like JPMorgan, I have my doubts about the valuation of this stock in the short term at least. In the longer term, however, I also agree with the analyst that Axon's business is booming, and will continue to boom for years to come.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Axon Enterprise. The Motley Fool has a disclosure policy.