Wrap Technologies (NASDAQ:WRTC) is a maker of nonlethal security devices. One shot from its BolaWrap sends out an eight-foot tether that wraps around suspects' arms or legs, safely and securely restraining them.

This small upstart was founded in 2016. It's outperformed the market since going public and over the past year. But having more than doubled just since March, is Wrap Technologies stock still a good buy today? 

A tether is shot out of a BolaWrap from Wrap Technologies.

The BolaWrap at work. Image source: Wrap Technologies.

What to like about Wrap Technologies

Wrap Technologies is a young company still in the early stages of building its business. It's been successful, signing new deals with law enforcement agencies both domestically and internationally. It's already received orders from over 150 agencies in the U.S., and delivered BolaWraps to 26 countries.

All those fresh deals have resulted in robust revenue growth. In the first quarter of 2020, Wrap Technologies revenue grew 485% year over year. That's fantastic, but it's still relatively meager income; Q1 revenue was only $689,000. There are more orders it expects to fulfill within the next year, however, totaling a $1.4 million backlog. 

Wrap's market capitalization is already over $250 million. Trading at more than 200 times trailing sales, this company needs to substantially grow its top line to be a long-term great investment. But there's reason to believe the management team has the requisite experience to pull it off. Wrap Technologies' president is Thomas Smith, a co-founder of the company formerly known as Taser International, now renamed Axon Enterprise (NASDAQ:AAXN).

Additionally, the potential market for a device like the BolaWrap is huge. Not only could law enforcement agents benefit from it, but private security workers could also. All told, Wrap Technologies believes over 110 million users worldwide could take advantage of this nonlethal restraining device. Even selling devices to just a fraction of those potential customers would represent enormous growth.

Increasing product visibility, triple-digit revenue growth, experienced leadership, and a large addressable market are all reasons to like Wrap Technologies stock.

A red exclamation point sits on a wood floor leaning against a wall.

Image source: Getty Images.

Why it's risky

Wrap Technologies isn't profitable, which isn't unusual for small-cap stocks. If it were just about the cost of making the BolaWrap, there wouldn't be a problem. The company had a 41% gross profit margin in Q1. But while it generated $689,000 in revenue, it spent $2.1 million on sales, marketing, and administrative costs in Q1 alone, and expects to spend at least that in each quarter of 2020.

The sales and marketing expenses are necessary. The BolaWrap is a new product, and agencies need to see demonstrations and receive training before making a purchase. That requires Wrap Technologies to pay trainers and travel expenses, which can add up for a small company. And there's no guarantee agencies will buy it. 

Furthermore, Wrap Technologies is a one-trick pony: It only sells the BolaWrap. It envisions having multiple devices someday, and more product lines would be good, but new product development adds to its net loss. The company spent $533,000 on research and development in Q1. That doesn't sound like much, but it's about double its gross profit. 

I gave Wrap Technologies a hard look for my personal portfolio recently but ultimately I decided to go with a less risky option for a core portfolio position. Here's why I bought Axon Enterprise over Wrap Technologies.

Two law enforcement officers review material on Evidence.com

Image source: Axon Enterprise.

A recurring revenue ecosystem, instead of a one-time sales product

Axon Enterprise isn't about just selling products. Yes, it sells Tasers and Axon body cameras. But it provides an entire ecosystem to law enforcement agencies. Through its subscription cloud-based software that integrates with its physical hardware, 71% of the company's 2019 revenue was tied to recurring contracts.

In the first quarter, Axon's annual recurring revenue was up 42% year over year to $174 million. Its cloud revenue was also up 42%, to $39 million. If agencies trim spending, like the $1 billion proposed cut for the New York Police Department, one-product hardware companies like Wrap Technologies could be dropped from budgets. By selling mission-critical software in a subscription package, Axon is much more likely to be retained.

Motley Fool co-founder David Gardner says, "Make your portfolio reflect your best vision for our future." And I think the BolaWrap could be a product that makes our society safer for everyone. I hope it succeeds.

That said, I believe Axon is the superior business for a portfolio. That doesn't mean I wouldn't take a more speculative position in Wrap Technologies, investing in a better vision of the future. But with its high-revenue growth, profitability, pristine balance sheet, and hard switching costs, Axon Enterprise is a business worth building a portfolio around.