Axon Enterprise (NASDAQ:AAXN) has built a dominant business in TASERs and body cameras, and the market has rewarded it with a $4.3 billion market cap. But that isn't reflective of the company's current earnings, which are almost nonexistent. Instead, investors are betting on a very profitable future for the company

To boost profits, Axon has a number of new products and monetization strategies that will play out over the next few years. Here's how we'll probably see that future play out. 

Axon Body 3 camera.

Image source: Axon Enterprise.

Subscriptions drive profitability

Axon has always generated a high margin from TASER sales, often over 70%. But sales can be lumpy, and profits are unpredictable as a result. 

Body cameras helped begin a transition to a smoother subscription business because they were usually tied to the Evidence.com service that is billed monthly. Now Axon is offering complete bundles of tasers, body cameras, cloud services, and other products through subscriptions, partly because it's a convenient way for law enforcement agencies to purchase, and partly because it's extremely high margin. Management expects more than a 70% margin for every bundle subscription it offers

Bundles and expected margins from Axon Enterprise.

Image source: Axon Enterprise. 

The table above shows the revenue (yellow) and gross margin (green) expected from each bundle from a simple TASER X2 bunde for $26 per month on the left to the OSP 7+ bundle for $199 per month on the right, which includes TASER 7, Axon Body 3, Axon Records, Sidearm, and more. 

As more customers subscribe to these bundles, Axon's margins should rise sharply. 

Lock-in with customers

When customers start using the Axon suite of products, it becomes a very sticky ecosystem. Law enforcement and prosecutors use cloud video, TASERs are now integrating with cameras, and the records system that will be released in the next year could become a key system for multiple points in law enforcement. 

As subscriptions become standard, lock-in will become even better for Axon. The company can renew with customers by offering incentives a year or two before a subscription ends and offer them new products and services as an incentive to stay with the company. According to management, this approach will help lower operating costs such as sales and marketing, increasing earnings in the long term. 

New products will push prices higher

Bundles range from $26 per month for a TASER to $199 per month for a TASER, body camera, cloud storage, Axon Records, and other products and services. As Axon grows its offerings, it will be able to keep expanding bundles and increasing prices. 

If customers are locked in to the Axon platform, Axon will be able to charge more for each package, because the cost of leaving Axon will be high. As evidence of that, management has said that early body camera adopters have renewed at a rate of over 99%, often renewing before contracts reach maturity and adding higher priced services when they renew. Over the next few years, we could easily see the $199 package increase in price by the time customers who are signing now renew in five years. Long term, more and more products and better lock-in will drive higher profitability. 

Investment now for payback later

Axon Enterprise's entire strategy right now is built around investing for future profits. It's built out research-and-development and sales staffs that keep the company's revenue growing but cut down on short-term profits. But as the customer base grows, we'll see operating leverage and those high-margin subscriptions pay off with rapidly rising profits.

But it will take time for the strategy to increase profitability will pay off. Axon Records won't hit any scale until next year and it won't be for another year or two after that that OSP 7+ packages will be commonplace. That's when we'll start to see see the real payoff. It's a very long-term bet, but Axon Enterprise is a company with huge profit potential for patient investors.