Law enforcement may not be the first place you think to look for a cloud stock, but there's one hiding in plain sight. Axon (AXON -0.34%) is the industry leader in tasers and body cameras, and has made software as a service through the cloud both its highest growth and most profitable business.

Tasers and sensors (body cameras) are still Axon's largest business, representing $84.0 million and $51.1 million, respectively, of sales in the last quarter of 2019. But Axon Cloud showed impressive growth of 42.8% to $36.8 million, and a 76.1% gross margin, which would be the envy of almost any company. As the cloud grows it will eventually become Axon's biggest business. Here's how the cloud business is driving growth, and even improving Axon's hardware business long-term. 

Axon Body 3 with a black background.

Image source: Axon.

The cloud drives Axon's future

When Axon started offering cloud services it was the first time it entered the world of software-type margins. The company developed the software that connected body cameras to the cloud and allowed law enforcement agencies to easily access and share videos in almost real-time. Like other software companies, it developed the software once and could sell it over and over again, driving high margins.

But that wasn't all that changed about Axon's business. Axon Cloud also allowed Axon to offer a compelling subscription service to customers, since cloud services were naturally sold on a subscription basis. It soon began lumping body cameras and tasers into its subscriptions, ensuring that customers refresh hardware along with their software. It's a razor (low margin) and blade (high margin) model, but in the hardware and software business. 

The model not only drives high margins and incremental revenue growth as services are added, but it will also lock customers in long-term. Once Axon's services become a part of law enforcement's everyday work, it'll be tough to switch to a new platform. 

A conduit for new products

Subscriptions now allow Axon to create different tiers for customers and add high-margin products to higher tiers. When Axon Records was introduced it was the key difference between the $109 per month OSP plan and the $149 OSP 7 plan. That $40 addition from Axon Records is extremely high-margin for Axon. 

As new products are added in the future they'll continue to be put into higher tiers of subscriptions. And that should keep pushing sales incrementally higher and help margins as well. And the improvement is all driven by Axon's growing cloud platform. 

Axon's growth story continues

The cloud has really enabled Axon to become a growth stock from both a revenue and margin perspective. It's adding high margin subscriptions that have a lot of lifetime value, and adding services that should grow revenue per customer as well. That's a great place to be, and I think will drive shareholder value in this law enforcement stock for the foreseeable future.