Stock Stories, Vol. 2: Third Time Was the Charm With This Stunning Business

In the common parlance of Wall Street, a "story stock" is one in which the numbers may not have arrived yet, but the narrative has -- and it's compelling enough to make investors buy essentially on spec. But from the perspective of Motley Fool co-founder David Gardner, every addition a Foolish investor makes to their portfolio has a story behind it, and on this week's episode of Rule Breaker Investing, he invites several of our analysts into the studio to share some of their favorites.

In this segment, one of The Fool's longest and most prolific veterans, Rick Munarriz, drops in to tell a tale of Tasers. The company behind the most popular stun gun took a sour turn not long after the Fool bought in back in 2004, and eventually, we decided it was time to break up. But like people, companies can change. They mature and grow -- as Taser did, into Axon Enterprise (AXON 2.64%).

A full transcript follows the video.

This video was recorded on June 6, 2018.

David Gardner: What is the stock that you have for stock story No. 4?

Rick Munarriz: Once upon a time, there was a company called Taser Systems. Of course, we know it now as Axon Enterprise, a very successful, one of the hottest stocks in the Supernova universe over the past few months, and over the past year, really. We recommended it back in late 2004 in Rule Breakers. It was rerecced nine months later in the summer of 2005, after the stock has lost almost two-thirds of its value. This was a company, back then, all they were really making were Tasers. True to their name, they were the leading stun gun maker. And when we actually sold, we recommended that our readers and subscribers actually sell the stock back in February 2009, the stock was taking a beating. This was a company that, there was a lot of negative publicity. There were some deaths related to Tasers, and that led to both the negative publicity and some lawsuits. Revenue fell in 2008. It would also go on to decline in 2010. The company was not profitable at the time.

It was pretty much a very sad stock. You almost tell yourself, "OK, let's write this one off. Let's never revisit it. Let's never check into the story again." But as investors, we have to think beyond that.

This was a stock that did not bounce back right away. It's not like, you think of early 2009, the market was pretty rough at that time, anyone who remembers -- it wasn't a stock to just bounce back once we said let it go. The stock was actually waffling about in the mid-single-digits for more than four years. And it wasn't until 2013 when the stock actually cracked over that double-digit ceiling again.

Let's fast-forward to happier times. Rule Breakers, October 2015, where you recommend it again. And it's still Taser Systems, it's not yet Axon Enterprises, but the model itself had evolved. This was a company that was no longer relying on their stun guns, even though it was commanding the largest chunk of their revenue, and it continues to do that. But, this was a company also behind the Axon wearable body cameras that police officers and military personnel were wearing so that they could document things that happen. This was also the company that would go on to establish evidence.com, which is the cloud-based platform that a lot of this data is stored on. There's a lot of video that gets recorded on these cameras.

Basically, they have the whole system down. They have the stun guns, they have the cameras. And these cameras, they have in-car cameras, it's not just the body cameras. They recently signed a partnership with DJI for drones, to work in partnership with them. This is a company that's really expanding the whole surveillance and tracking stuff. And when you think about stuff in the news, where there's always these very unfortunate fatal encounters between officers and people on the road, whether the suspects are innocent, whatever the case may be, these are incidents that are recorded because Axon Enterprises is there recording these things.

Ever since Rule Breakers recommended it in October 2015, the stock has almost tripled. Back in early 2017, the first week of 2017, in Supernova in the Phoenix 2 mission that I'm the lead analyst for, we bought it, and it was essentially roughly at the same price as the Rule Breakers recommendation in 2015, $23 and change.

Gardner: Great!

Munarriz: But the stock then has also gone on to triple. I bought it personally. I can say that I'm glad that I bought it personally. I bought it three weeks after the Phoenix 2 recommendation, and I'm up 167%. So, I'm not doing as well as Rule Breakers subscribes and Phoenix 2 subscribers that have followed us from the very first get-go, but I'm very happy to say that this is a stock that, the company is now very profitable. It's growing. In its last quarter, revenue was up 28%, but stun guns were up 10%, and accounting for almost two-thirds of the revenue.

But the real driver here, obviously, is these wearable cameras, this evidence.com, all these new ways, the sensors and software segment of the company that exploded by 75% in its last latest quarter. This is a very dynamic company.

To me, the lesson here is, quite simply, goodbye isn't always forever. Always remember that. Sometimes you buy a stock too soon, you buy a stock too late. You could sell a stock too soon, you could sell a stock too late. But when you recognize that the company has changed, it's evolved into the company you always wanted it to be, it's never too late to approach your ex-girlfriend or ex-boyfriend or ex-high school sweetheart and say, "Let's give it another go, because I think you've changed."

Gardner: [laughs] It is an outstanding tale of that, Rick. I'm really glad that you bought it. I've never owned it personally. I'm delighted that we've recommended it for Rule Breaker members who've benefited. I'm very happy, though, to hear that you have more than doubled.

To me, especially, I think last year was exciting for this stock, because the performance of the stock at the time was not that exciting about 12 months ago. But what was happening is, the company was getting these cameras, these police body cams, out in the field, more at cost, not making a lot of money. So, their revenues were growing, but the profits didn't look so good. The stock was getting a little bit dinged for that. But, we were talking as a team, you and I were talking about how, it's evidence.com, their website, where all this video goes up and lives in the cloud, and every police department subscribes to it. That's the kind of razor and blades model that was in place for Axon Enterprises. And now, we're benefiting from that same dynamic, where people start to realize there's a lot of profit up there.

Munarriz: Absolutely! Axon is selling the stun guns and the body cameras, and even [...] cameras. They like to sell them with five-year deals. It's a five-year deal, you pay $129 a month and you have access to the unlimited storage on evidence.com. It's sort of like, once they get a sale, it's almost locked in for five years, so there's great visibility now in what Axon is doing. Not only is it growing, but it's actually becoming a more reliable, dependable, steady company. Almost boring, but not if you look at its stock chart.

Gardner: Alright. In closing, Rick, you and I are looking backwards. Obviously, we're telling stories of the past. But, when you consider that Axon today has a market cap of only about $3 billion, I don't think this is a stock that anybody's missed. I don't think they should think, "Oh, darn it, I wish I had bought it with Rick a couple of years ago." I think, going forward, I see a category leader. I don't see a lot of competition. I see only a $3 billion market cap. Your thoughts?

Munarriz: Yeah, definitely. Clearly, we were way too early in 2004. But I think we were still early in 2015. I definitely think the best has yet to come for Axon Enterprise. And yes, obviously, the stock has been hot for the past year and a half. But the real big gains, I think, will come in the future. Everything that it's doing, everything that it's expanding, is going to play out. It's going to work out pretty well, I hope, for investors.