What happened

Shares of AMMO (POWW -2.35%) fell by 16.3% in September, according to data provided by S&P Global Market Intelligence, as heavy demand for firearms and ammunition seemed to ease up.

Raw FBI data shows criminal background checks on potential gun buyers through the National Instant Criminal Background Check System (NICS) fell by 13% in August and were down by another 9% in September compared to the same months last year.  

Though in mid-August, the ammo maker delivered a blockbuster report for its fiscal 2022 first-quarter (which ended June 30), investors pulled back on its stock in September.

Man and woman dressed for hunting

Image source: Getty Images.

So what

Although the direction of the statistics might seem to suggest guns and ammo sales are declining, that's actually not the case. Last year, a combination of civil unrest in some U.S. cities, intensifying calls for major police reform, and an incendiary presidential election campaign helped drive background checks on gun buyers to an all-time high.

While the gun sales run-up is easing a bit, criminal background checks in 2021 are still running ahead of last year. Year to date, the FBI has processed over 30 million checks; last year at this time, it had processed over 28 million.

The National Shooting Sports Foundation takes the FBI data and adjusts the numbers to remove duplicate checks on existing concealed-carry permit holders, a process that gives a better idea of actual consumer demand for gun purchases. While those figures do show a decline year over year, this year's numbers are running 27% ahead of 2019 and are 37% above 2016, the previous record year.

Now what

Demand for firearms continues to trend higher even if it ebbs and flows from year to year, and with that growth in gun sales comes rising demand for ammunition. There has been an ammo shortage for over a year, and it's showing no signs of letting up. Gun stores report that ammo is still hard to find.​​

That suggests there remains a strong tailwind behind AMMO, which is increasing its production capacity to help meet demand.

But given that it's trading at less than 14 times next year's earnings expectations, it looks like the market mistakenly believes this ammo maker has little firepower left.