The market's reaction to the fourth-quarter earnings results of Axon Enterprise (NASDAQ:AAXN) is one of those opportunities investors crave but don't see nearly often enough to take advantage of. By sending the stun-gun maker's stock 10% lower due to it ostensibly missing Wall Street's earnings expectations, the market has given investors the opportunity to capitalize on that myopia, because Axon is actually executing well on its long-term goals.

Eye on the future

On the surface, the TASER and Axon body camera manufacturer looks wildly expensive at 93 times trailing earnings and over 60 times next year's estimates, even after its stock tumbled, but that's only if you think of it as a hardware maker. Instead, it's really a tech stock in disguise, and one that's growing rapidly, so you can't count on traditional metrics to price it.

Police officer wearing new TASER 7 and Axon 3 body camera

Image source: Axon Enterprise.

The real driver for Axon's future is its software-as-a-service business, Evidence.com. This cloud-based evidence management database is the webbing that holds together all the other pieces of its business and provides a massive opportunity for future growth.

Segment revenue in the fourth quarter surged 50% to $25.8 million, or 21% of the company's total revenue gains of $115 million. The importance of this business can't be overstressed because it is going to lift the rest of Axon's operations.

Check out the latest earnings call transcript for Axon Enterprise.

Creating new ways to sell

Data collected from body cameras is stored on Evidence.com and gives law-enforcement agencies a critical tool for managing the data. Not only is it a repository for the video captured, but it provides a chain of custody log for the department and an ability to capture and extract the exact information necessary for a case.

Rather than manually searching through hours of videotape, as the old analog systems required, the digital network offers law enforcement agencies simple, intuitive tools that create greater efficiency. That gives agencies an incentive to continue using the database as well as disincentives for for switching to another provider. 

Key, though, is that the evidence-management system encourages additional sales of camera systems, which Axon is multiplying through a new initiative that bundles Evidence.com subscriptions with sales of the new TASER 7 conducted electrical weapon and the latest Axon 3 body camera. Customers who buy the three-product package get a five-year subscription to Evidence.com for free.

The only game in town

Axon is seeing strong interest in the latest iteration of the TASER, so much so that departments are considering upgrading earlier than their typical five-year contract expiration date, which is a testament to the improved capabilities of the weapon that is now tied into the Evidence.com system. And Axon is letting the departments upgrade early because not only it is good customer service, but it also weds them ever more tightly to the ecosystem even though it compresses margins in the near term.

The margin compression was partially what the market was reacting to in sending Axon's stock lower. Although it also saw margins squeezed by the acquisition of VIEVU, which created more headwinds than expected, Axon knew it would be a dilutive acquisition when it was made.

Yet now, Axon owns virtually the entire body camera market, with no significant rival to challenge it. It still has ongoing patent litigation with tiny Digital Ally, but Axon owns 80% of the big-city market for cameras. It's a virtual monopoly now, yet it is still innovating and targeting customer service.

The future is even brighter

Among those innovations are new areas for potential growth. Axon is looking to expand cameras into adjacent markets like medical first responders and fire departments, for which it has already sold its first system. Other possibilities include solutions for record-keeping and dispatching (though it has yet to divulge details on what it is planning in these areas) and military contracts.

This is why the stock market's reaction to Axon Enterprise's fourth-quarter earnings is a gift to investors who have been looking for an entry point into the stock. There is a large runway of opportunity in front of the company that has become more than just a stun-gun maker, and for those willing to look beyond a single quarter's earnings results that are not representative of its potential, this stealth software provider is one to consider.