One of the best-performing stocks of the last decade has been public-safety specialist Axon Enterprise (AXON 0.28%), which is up 3,840% compared to a total return of 298% for the S&P 500. Axon has made an incredible transition from being just a Taser company to offering one of the more powerful software-as-a-service (SaaS) platforms in the world. And it has more room to grow.
As we look at Axon's position in the market today, the company continues to expand its product lineup and market share, and there doesn't seem to be anything stopping its future growth.
Image source: Axon.
A focus on growth
If there's one operating theme for Axon over the last decade, it's been revenue growth. The company has invested heavily in expanding the product line beyond Tasers into body cameras and cloud products, which has also required a heavy sales investment. You can see below that revenue is rising rapidly but Axon is actually losing money, despite relatively steady gross margin.
AXON Revenue (TTM) data by YCharts.
This high-growth, low-profit result is an intentional SaaS strategy for Axon, which is why investors haven't been worried. And the company continues to expand both its product lineup and sales force in a search for more growth and potentially more profit long-term.
Land and expand in law enforcement
A land-and-expand strategy that's typical in technology has been successful for Axon, despite its hardware roots. For Axon, it consists of selling an initial set of products like Tasers or body cameras to law enforcement agencies and then trying to increase the number of software tools each agency uses.
Today's strategy involves the body camera as the centerpiece product, with 46,094 Axon Body cameras sold in the first quarter compared to 23,360 Taser 7 units. Following the body camera hardware is SaaS products that have become the best way to expand margin from each customer.
To put some numbers behind where Axon's growth has come from, between 2016 and 2020, Taser sales rose 16% compounded annually to $367 million while "sensors and other," which is mainly cameras, grew 40% to $137 million and Axon Cloud increased 57% to $177 million.
The ultimate strategy for Axon is to grow high-margin Axon Cloud sales as much as possible. In the first quarter of 2021, sensor gross margin was 41.1%, while cloud gross margin was 75.1%. Axon isn't just landing and expanding with more products; it's expanding with its highest-margin product and that should continue as more SaaS offerings hit the market.
Axon Cloud is the future of Axon
The cloud video-storage business Evidence.com, which started Axon's SaaS transition, has added multiple products to the lineup. Axon Records pulls together evidence in a simple records system. There's also a dispatch service, a car fleet offering, and even wireless upload of data so that first responders can use video evidence in near-real time.
There are additional products and services coming to market, like a drone from Skydio and virtual reality training products that will expand the lineup further. And most of the company's new products should continue to be high margin and increase the value that Axon's base cloud service offers.
No end to growth in sight
Management thinks Axon has a total addressable market of $27 billion, and with $729 million in sales in the last year, it has a lot of runway ahead. We've also seen the addressable market expand as Axon adds additional hardware and SaaS products to its lineup. This could be a growth stock for the next decade as well, and it will likely continue to be a big winner for investors, which is why I'm staying very bullish on this stock.
