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Why Axon Enterprise Stock Just Dropped 6%

By Rich Smith - Dec 16, 2020 at 10:54AM

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A JMP downgrade bites deep at Axon.

What happened

Shares of Axon Enterprise ( AXON -5.84% ), maker of stun guns and body cameras for police, are diving in early trading Wednesday, down 5.7% as of 10:20 a.m. EST.

You can thank JMP Securities for that.

Simple red arrow declining stock chart on a white checked background

Image source: Getty Images.

So what

This morning, analysts at the San Francisco investment bank cut their rating on Axon stock from outperform to market perform, as reported by

According to JMP, Axon is heading into 2021 well positioned to profit from sales to law enforcement, with the nation's biggest "electroshock weapons business with Taser" and a growing body cameras business besides. However, the analyst also believes that Axon's advantages are priced into the stock at its current valuation of 12 times trailing sales and 11 times the analyst's best guess at 2021 sales.

Now what

And that's being kind.

Looked at even more skeptically, at a recent valuation of $8.2 billion, Axon trades for a staggering 745 times what it is expected to earn next year, and infinity-times the net loss it's expected to incur this year. Granted, there are other valuations one might apply to Axon. Personally, I'd value the stock on free cash flow rather than either sales or earnings under generally accepted accounting principles (GAAP). But even by that metric, Axon costs more than 850 times anticipated 2020 free cash flow, and nearly 86 times next year's projected cash profits.

Long story short, the case of Axon is one of "great company, overpriced stock" -- and I wouldn't buy it.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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$150.06 (-5.84%) $-9.30

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