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How Big Are Axon Enterprise's Ambitions?

By Travis Hoium - Dec 1, 2018 at 8:36AM

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Axon Enterprise has a big total addressable market and a long way to go in reaching those customers.

When Axon Enterprise (AXON -0.57%) CEO Rick Smith announced a pay package that could net him $1 billion in compensation over the next decade, it set lofty expectations for the company's performance. Not only would the company's market cap have to grow to $13.5 billion to hit the highest tranche (from $2.7 billion today), it would also have to grow revenue more than 5 times to $2 billion and generate EBITDA of $230 million to hit all targets. 

Just how does Axon Enterprise plan on hitting those lofty growth targets, and can progress on its growth plan turn around the stock? Let's take a look at where the company sees the most potential. 

Officer wearing Axon Body 3 and Taser 7 products.

Image source: Axon Enterprise.

Axon's $8.4 billion market opportunity

In a recent presentation to investors, Axon's management laid out where it sees its financial opportunity. Tasers make up $1.8 billion in total addressable market, with $1.3 billion of market potential coming from international agencies. 

Existing sensors like body cameras, the Axon fleet auto camera, and the signal sidearm sensor are expected to be another $848 million market, relatively modest considering how much hype there is around body cameras. But cameras and sensors are really just enablers of Axon's cloud-based business

The big opportunity is management's projected $5.8 billion in cloud market potential. The business includes software for body cameras like Evidence.com cloud backup, Axon Records, and "advanced intelligence & analytic add-ons," which are advanced data mining features only now being introduced. 

Services become the core of Axon Enterprise

Notice that nearly 70% of Axon's total addressable market is now in the cloud business. This is now the core of Axon's business, with hardware simply serving as a way to get the software into customers' hands. It's a typical razor-and-blade business model, where the hardware is simply a tool to generate high-margin recurring revenue. 

What Axon needs to prove is the ability to engrain itself deeply into law enforcement's everyday tasks. Axon Records is meant to be a service used every day by officers, reducing paperwork and improving accuracy. Advanced intelligence and analytics are going to be ways to identify where disparate pieces of evidence are automatically and analyze data quickly. These could be tools that law enforcement agencies value if they're designed in the right way. 

No matter how you look at it, Axon's future is all about software services, and given the high-margin profile in software, that could be a good place to be. 

A long way to go

To reach the addressable market numbers above, the number of users Axon assumes are incredibly optimistic. Its Axon Records & Axon Dispatch user assumption alone is 2.1 million, which would far exceed the 1.2 million sworn officers in the U.S. and be a huge jump from 325,200 seats booked as of the end of the third quarter. 

Axon also assumes that officers will add more services, like Axon Records and advanced intelligence, as they come available. That may be an optimistic model when you consider that today's high-end offering will run each officer $199 per month, and Axon would like it to grow to as much as $500 per month for more tools and advanced features. 

Expanding its reach beyond existing hardware to more software tools that are paid for with long-term subscriptions is where Axon's management sees the business going. I think Axon has a lot of growth potential, but hitting $2 billion in revenue and $230 million in EBITDA within the next decade would require a lot of chips falling the right way for the company.

What investors should watch for to measure progress is a quick adoption of Axon Records in 2019, continued double-digit growth in the number of cloud-based seats booked each year, and expansion of revenue per officer. If all three of those metrics are doing well, this could still be a huge winner given CEO Rick Smith's compensation plan and a big winner for investors long term as well. 

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