Why This SaaS Stock Can Continue to Dominate Its Field

The past year has been a wild one -- in real life and in the stock market. But for shareholders of Axon Enterprise (AXON 1.27%), the roller-coaster ride of the past couple of months has been extreme: The stock vaulted 75% on higher on no news to start 2021. It followed it up with a 30% drop in the stock.

Should investors be worried about this software-as-a-service (SaaS) company? Not really, says Motley Fool contributor Brian Stoffel. In this video recorded on Feb. 26, he discusses the company's fourth quarter earnings results, and why he remains an enthusiastic shareholder.

Brian Stoffel: Last night they reported, and so I just want to show you a little bit about what Axon reported. For those of you who aren't aware, there's three lines of business with Axon. One, stun guns. Tasers is what we call them; they used to be known as Taser International. Two is Axon body cameras. Those have played an enormous role in the United States. Unfortunately, over the past year, year plus, three years, these are the devices that capture what happens when there are incidents in our world between people and mostly the police, but then the last one is the one that from an investing standpoint is really important, and that's the Cloud services. That's where all of the footage gets downloaded, and searched, and analyzed. That's where they're rolling out a whole bunch of new products.

I'm going to just do a screen share, I'm going to show you guys what the company reported. If we break down those three areas, and can you guys give me a thumbs up? Can you see that sales growth in the fourth quarter? All right, cool.

Jason Hall: It's a little small, but it's OK.

Stoffel: The taser weapons here from the fourth quarter of last year to the fourth quarter of this year, it grew a pretty incredible amount, 63%. Now, a huge part of that is because one international customer made a $20 million purchase. That's a huge part of it, and we'll get to that in a minute. The Axon area actually shrunk but that was to be expected. They shipped a ton of body cameras during the fourth quarter last year because they had a new model, and they knew that they weren't going to sell as many. This one, unlike tasers, because with tasers, every time you use it, you have to replace it with a new cartridge. Well, it's not the same way with Axon. It's not like 30 or 40 years ago where you've got to take the tape out and replace it with a new tape. It's all digital, so there's no repeat purchases. It's the growth of this top section here, the cloud services, that's really important. That grew 39% because that's really high margin revenue.

Then if we just take a look at the full year, since this was the fourth quarter, we can see this blue section. Taser was up 30%, Axon was up 16%, and this cloud services was up the most, 37%. Here's why that's so important. You look at this and you think, "OK, in 2020, I bet tasers is most of the gross profit and then these two split it," but if you look at it, you can see that they make pretty nice gross margins off of their Taser segment, and not much with their body cameras, which is to be expected because they're not that hard to make. And I already have seen someone in the queue ask about Motorola heading into the same direction. This is why it's low margin because anyone can make a body camera, but this section right here, the cloud services, their gross profit there grew 42%, which is faster than their revenue grew, which means that they are getting some leverage.

But when we talked about it two or three weeks ago, I pointed out the three things that I wanted to look at, and it was how their new Cloud services we're performing, how it was performing with other agencies that weren't police departments, and their opportunity for international expansion. What I just want to say is, Axon records, they didn't give us specifics but they've deployed multiple new customers, last quarter, it was just Baltimore PD, we know there's more now. Axon Respond, there's a letter to the shareholders and it led off with an example of how beneficial Axon Respond is a situation where an officer was being pinned down by a suspect and was in trouble, and was unable to give their location to the dispatcher because of the struggle, and because this department had Axon Respond, they were able to find out where this was occurring and everyone went home alive. So that's a dramatic, but also probably pretty accurate way of showing what this platform can do. They had multiple people go live on that. They even gave an example that Chile is using Axon Respond to monitor the supply chain for COVID-19 vaccinations. So that segue is to the second part which is non-police departments using this. They said that there's a lot of interest in Axon Respond outside of police forces which I thought was very interesting.

Then with international, like I said, they had a $20 million order. They didn't specify who it was. The biggest order that they've ever had, and then their sales internationally were up 70%, and they think there's so much potential that they are investing in expanding their operations in Europe in 2021, and that's a pretty positive sign when they're willing to do that.

I just want to show, they don't always publish these key figures but since they did, I just want to show them. So this is their annual recurring revenue, and that's their subscription revenue. That was up 37%. They don't often give this, net revenue retention. Boy, that's pretty solid, you guys. If you stay with Axon, you're going to spend 20% more every year. If you guys know compounding, if you're investing, getting 20% every year, you are doing pretty well. Well, that's what Axon is doing with their existing customers. The last thing I want to point out is that their future contracted revenue is up 41%. I think that it was a great earnings call. I think that there's a lot of good stuff happening