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Why Axon Enterprise Stock Was Down 15% in July

By Jon Quast - Aug 7, 2020 at 4:53PM

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What happens when law enforcement agencies have their budgets cut?

What happened

Shares of Axon Enterprise (AXON 0.99%) fell 15.3% in July, according to data provided by S&P Global Market Intelligence. At one point, Axon stock was up 40% for 2020, as people see its product as a way to make law enforcement better.

But some cries to reduce funding for law enforcement agencies grew louder in July, leading investors to question Axon's future. The stock slipped as a result.

AAXN Chart

AAXN data by YCharts

So what

Axon kicked July off by announcing a new contract with the Baltimore Police Department for Axon Records -- a service designed to make filing reports more efficient. The agency is one of the largest in the country, and already had an existing relationship with Axon. It's what the company envisions: grow revenue by offering more services to existing customers over time.

Axon's results for the second quarter of 2020, reported in August, bore this out. Total revenue grew 26% year over year to $141 million, and annual recurring revenue grew 42% to $183 million. Those numbers are good enough. But its net revenue retention, which tracks existing customer spending, was 119%. In other words, departments like Baltimore are spending more, great news for shareholders.

However, many U.S. citizens would like to see police funds redirected to other things, and some politicians are starting to listen. In San Francisco, the mayor intends to lower the police department's budget by $120 million. The New York City Police Department is facing a whopping $1 billion in budget cuts.

Police departments in the U.S. are Axon's primary customers. Seeing these departments with less money to spend is certainly unsettling for shareholders. That's why the stock was down in July.

An red, upward arrow breaks near the top, resulting in it pointing down.

Image source: Getty Images.

Now what

No one has a crystal ball, and it's still early in the conversation for police reform. According to a Gallup poll, only 15% of Americans want to abolish the police outright, so this idea is unlikely to gain traction. Therefore, it's reasonable to assume there'll still be a form of law enforcement long term. The present conversation is merely on how to make it better.

To me, Axon Enterprise is part of the solution. And since it makes law enforcement safer and more efficient, it seems likely agencies will continue using the company's services if at all possible. Things might get bumpy while the country tries to sort things out. But with $687 million in cash and zero debt, this is as safe a stock as you'll find during cloudy times.

Jon Quast owns shares of Axon Enterprise. The Motley Fool owns shares of and recommends Axon Enterprise. The Motley Fool has a disclosure policy.

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