Is This Red-Hot Growth Stock the Apple of Law Enforcement?

Axon Enterprise (AXON 2.64%) has already surpassed investors' expectations but it might not have cashed in on a major growth opportunity yet. In this clip from "3 Minute Stocks Updates" on Motley Fool Live, recorded on Jan. 5, Motley Fool contributors Brian Feroldi and Brian Withers discuss how Axon Enterprise has the potential to explode in growth in the consumer market and why its one stock to watch for the long-term.

Brian Feroldi: Moving on to Axon Enterprise, ticker symbol AXON. If you're scratching your head, what does this company do? You might know them better by their former name, Taser International. This company has been a red-hot growth stock for many years and that growth continues in the most recent quarter. Sales of the company's tasers and their consumable cartridges' recurring revenue grew 44%, and gross profit there grew 51%. Margins increased. It's actually a pretty high-margin product right there. The Axon segment. Axon is the body cameras that grew at a slower rate, 29%, but the company's gross profit in that segment actually grew 70%. Margin improvement there in the company's body cameras. What makes this company compelling, I believe, is the company's software products. Hardware products are cool but sales of those can be lumpy. But Axon's evidence.com, Axon's Records, Axon's Respond program, they're all software-as-a-service sold. They worked directly with the company's tasers and the company's hardware products to make a real ecosystem. I don't think it's a stretch to call this the Apple (AAPL 0.64%) of law enforcement. Essentially, they're going after a similar business model. Cloud products during the most recent quarter grew 39% during the period and that helped the company's annualized recurring revenue total across the business grew 42%. For SaaS fans, the company's net revenue retention rate was 119%, which is a pretty big number there. Now, the interesting tidbit for me in that most recent report was that the company actually declared that it expects the consumer segment, so you and me buying these products, will actually be bigger. The company's biggest market moving forward, bigger than law enforcement, so much so that the company actually now believes that its total addressable market opportunity, because of its new products and new markets it's going after, recently almost doubled from $27 billion to $52 billion. For the full-year, the management team increased its revenue guidance and now expects $850 million in full-year revenue. That represents a growth rate of 25% over the prior year and, longer-term, management is aiming for at least a 20% revenue growth rate over the long term. This business is doing exactly what it needs to do. There is still lots of room for this company to conquer.

Brian Withers: Yeah, I've always liked this company. But I actually sold out a couple years ago because I was unfamiliar as law enforcement budgets get trimmed down and we have state and local budget shortfalls and government cuts. How does that impact? I was trying to think about how does that impact the purchase of these products. But now that the value of these products, software, and services are more of a proven entity, is that really a concern anymore?

Feroldi: I don't think so. I don't have the number in front of me but imagine what a police force's budget is. For every $100 in total budget, how much of it goes into taser and software and that I have to think it's 1%, maybe 2%, something like that. This is not a source of budgets being off or anything like that. This wouldn't be the thing you go after. Keep in mind that Axon's products, the body cameras, and the tasers, they're meant to decrease violence that happens between the police and the general population. The software actually ties it all together and reduces their record-keeping burden. I would think that this would be the last thing that you would want to cut if you're looking to save money. However, you bring up a good point when you are dependent on government spending, that can have implications. However, if management is right that long-term they think that the consumer is going to be the biggest source of revenue, that risk should diminish over time, but it's absolutely something to watch.