Axon Enterprise (AXON 2.64%) is trying to become the world's best hardware and software provider for law enforcement agencies. From its flagship TASER product to workflow software backed up on, the company offers numerous products to police departments around the globe. Even though Axon has grown its business substantially over the last few years, and while putting up another solid earnings result in the first quarter, the stock price is down over 25% in the last three months.

Is now the time to buy some shares in Axon, with the stock trading at a discount? Let's take a look. 

Q1 results filled with growing metrics

In the first quarter of 2021, Axon's revenue was up 33% from 2020 to $195 million. All three of Axon's operating segments (TASER, Sensors, and Cloud) grew at a rapid pace. TASER sales were up 30% year over year to $100 million, while Sensor sales grew 36% to $44 million and Cloud revenue grew 34% to $52 million.

A female police officer holds a TASER weapon as if preparing to shoot it with a police vehicle in the background

Image source: Axon Enterprise.

While the top-line numbers looked great, consolidated gross margin hit 63.6% in Q1, the highest that number's been in 10 quarters. This shows that Axon is starting to see some leverage with the unit economics of its business. The company is not currently GAAP profitable (although it has been in prior quarters), so gross margin is the best way to evaluate its financial health at the moment. Investors should watch and expect that in the future the company will start generating consistent GAAP profits and cash flow.

Management also updated investors with 2021 and 2022 guidance in the Q1 report. Axon now expects around $800 million in revenue this year and $920 million next year. Since customers (i.e., law enforcement departments) sign five- or even 10-year deals with Axon, its future revenue is highly predictable.

Potential for growth abounds

Axon continues to add new hardware and software products to its portfolio suite that it bundles and sells to law enforcement agencies. Q1 was no exception. New product bookings were up 130% in Q1, handily outpacing the growth of Axon's legacy solutions.

One of these new products is Axon Performance, which helps police departments review body camera footage more efficiently and makes sure officers are following appropriate department guidelines. Axon Performance works well with Axon's latest body camera product, the Axon Body 3, and is an example of how the company is integrating its hardware and software product suite, making it an easier pitch when it sells to police departments. Axon Performance also locks in departments to, Axon's cloud-based evidence management system. 

On other fronts, Axon just announced a new officer virtual reality (VR) training program. The solution, in partnership with Taiwan-based HTC (which provides the VR headset), helps officers train in lifelike situations before heading out into the real-world conflicts they are eventually going to meet. This VR program is not only something Axon can add to its product bundle, but also works to integrate its TASER and body cameras into police officer training, further ingraining the hardware tools within the department.

These two new products are just the tip of the iceberg. Axon continually comes out with new solutions for its customer base, which has led its contracted backlog to reach $1.79 billion at the end of Q1, up from $1.27 billion a year ago, as more and more police departments, federal agencies, and correctional facilities sign multi-year contracts for Axon's solutions.

But is the stock a buy?

At a market cap of $8.45 billion, Axon is trading at a forward price-to-sales ratio (P/S) of 10.5 based on the midpoint of its 2021 sales guidance. This is expensive even when considering the high gross margins of Axon's business. However, if you look at the $1.79 billion backlog and the opportunities that abound expanding its hardware and software bundle across the globe, there is a compelling case that Axon can grow its revenue at a 20%-plus rate over the next five years and beyond. If you believe that is the case, and are bullish on Axon's business prospects, it is entirely reasonable to buy shares at a P/S above 10 if you plan on holding for the long term.