What happened
Shares of law enforcement hardware and technology company Axon Enterprise (AXON -0.52%) got hammered on Wednesday after the company reported financial results for the first quarter of 2023. As of 11:15 a.m. ET, Axon stock was down about 17%.
So what
There are a lot of moving pieces in Axon's financial reports, but suffice it to say that most metrics are pointing up. The company generated record revenue of $343 million in Q1, up 34% year over year. Moreover, much of Axon's revenue is on a subscription plan, making recurring revenue a metric worth tracking. Annual recurring revenue (ARR) reached $520 million in Q1, up an even more impressive 49%.
However, while year-over-year numbers looked good for Axon, investors may be fretting today about its future growth rate. The company signs long-term contracts with law enforcement agencies and, for this reason, investors look at future contract revenue to get a sense of growth going forward.
Axon ended Q1 with nearly $4.8 billion in future contracted revenue. That was at an all-time high, which is good. However, that was less than a 3% increase from where it stood at the end of the fourth quarter of 2022. To be fair, the first quarter is naturally a little bit slower for Axon. That said, future contract revenue jumped 6% between the fourth quarter of 2021 and the first quarter of 2022.
Prior to today's sell-off, Axon stock was up 37% year to date and handily outperforming the market. It seems that investors are taking some chips off the table in light of the possibility of slowing growth, even though Axon's numbers were good on the surface.
Now what
In light of Q1 results, Axon's management raised its full-year revenue guidance for 2023 and now expects roughly 22% year-over-year growth compared to the 20% growth it forecast previously.
Moreover, Axon also turned in its fifth consecutive quarter of profitability according to generally accepted accounting principles (GAAP). Therefore, the business is getting financially stronger. And not only that, its GAAP profitability paved the way for Axon stock to be added to the S&P 500 last week.
To be clear, Axon is an expensive stock at about 14 times its sales. Therefore, it has valuation risk that is made more acute with the prospect of slower growth. However, the business remains strong despite the stock getting hammered today.
