Axon Enterprises (NASDAQ:AAXN) has transformed from a stun-gun maker to the leading software-as-a-service (SaaS) platform for law enforcement. The stock has more than tripled over the past five years, and the potential for new products and markets is stunning.

But take one peek at its forecast for 2020, and you might think shareholders are in for a world of hurt. The stock trades for nearly 100 times free cash flow and 67 times non-GAAP (adjusted) earnings estimates. And yet sales are expected to climb ... a measly 17% this year.

Long term, though, there's more to like here than you might think.

A girl looking through binoculars with a blue sky in the background.

Image source: Getty Images.

The headline numbers

Before we get to the hidden potential, let's review how Axon's headline numbers shook out for its fourth-quarter earnings report.

Metric  Q4 2019 Q4 2018 YOY Growth
Revenue $172 million $115 million 50%
Earnings per share (non-GAAP) $0.41 $0.08 413%
Free cash flow $42 million $27 million 56%

Data source: Axon Enterprises SEC filings.

While these numbers look great -- and they are great -- context is needed. Axon shipped a record number of new Axon Body 3 cameras in the fourth quarter that juiced results considerably. On a full-year basis, revenue and adjusted earnings per share increased 26% and 41%, respectively. Free cash flow was up less than 5% year over year.

That said, these numbers don't tell the whole story either. Heading into the fourth-quarter release, I highlighted the key metrics I would be watching. Foremost among them: the number of officers with seats booked on Axon's Evidence.com platform, which stores and analyzes police body-cam footage.

Chart showing cumulative seats booked on Evidence.com over time

Data source: Axon Enterprises SEC filings. Chart by author.

These results are stellar: Axon added over 35,000 new Evidence.com subscriptions in three months, and the total surged 34% for the year.

Giving it away for free

But the company isn't hitting the breaks at all. In a video released in conjunction with the recent earnings, it outlined where it hoped to be positioned by 2030. Among the goals:

  • TASER weapons will be the primary means to stop a threat. In other words, the bullet won't be necessary.
  • Body cameras will eliminate the majority of report writing, via Axon Records.
  • Almost all communication and dispatch with officers in the field will be conducted via cloud software.
  • Axon will be a household name.

This hits on the major products the company has either already developed or will soon develop. In order, they are: TASER weapons, body cameras, Evidence.com, Axon Records Management System, and a new dispatch solution that is slated to come out in the next year. 

How will it accomplish those goals? My guess is it will bundle in these new services for free in the subscriptions that most police departments have.

There's already a precedent for this. When Axon pivoted toward body cameras, it decided to give them away for free, along with one year of access to Evidence.com. Now, such subscriptions come with free upgrades and a free year of Axon Records -- which will likely be the next big growth driver for Axon.

As you might expect, when you give this much away for free, it can take a while for any revenue -- let alone profit -- to hit the income statement. Thus the tepid 17% growth guidance.

A win-win-win

Why is Axon so eager to give this all away? Because it knows the moat surrounding the company's business is a mile wide. 

Think about it. If you're a police department that pays a single fee to cover TASERs, body cameras, and the SaaS services that analyze footage, use AI to automatically fill time-consuming records, and communicate with officers, it would be an enormous pain -- financially, logistically, and in terms of losing critical data -- to switch to another provider. 

This sets up a situation that's good for police departments (they can test the new tools for free), good for the communities they serve (less time on paperwork means more time in the field), and good for shareholders.

If you're willing to be patient to let the story play out, I think you'll be richly rewarded by investigating Axon for your own portfolio.