What happened

Shares of Axon Enterprise (AXON 0.65%) leaped 17.7% higher through 10:25 a.m. ET on Wednesday after the company reported a huge earnings beat last night.

Heading into Q2 2023, analysts had forecast the maker of Taser stun guns and Axon police body cameras would earn only $0.62 per share on $350.5 million in sales. But then Axon went and reported a profit of nearly double what was expected -- $1.11 per share -- and a beat on sales as well -- $374.6 million.

So what

Total sales for the quarter grew 31% year over year (YOY), led by Axon Cloud and services revenue, which was up 62% YOY. At $133 million, this high-margin recurring revenue now accounts for 38% of Axon's revenue stream -- and is growing at a 52% annualized rate.  

Oh, and gross profit margins on those sales grew to 62%.

Now, not all the news is as great as the headline figures suggest. Axon's $1.11-per-share profit, for example, was only a pro forma, adjusted number. Actual earnings for the quarter as calculated according to generally accepted accounting principles (GAAP) were only $0.16 per share -- and that number was down 77.5% YOY.

Now what

Still, cash flow data from the company confirm that things are going well for Axon. Cash generated from operations in the quarter was a healthy $42.6 million. Minus capital spending of $13.1 million, that still left Axon with $29.5 million in positive free cash flow -- a 340% increase from one year ago. That brings Axon's trailing free cash flow over the past 12 months to just under $111 million, and about 12% ahead of reported net income.

All this being said, though -- and not to take anything away from a very fine quarter for Axon the business -- I still think Axon Enterprise stock is too expensive to invest in. Relative to its $15.3 billion market capitalization, Axon is selling for a multiple to free cash flow of about 137, and it's even more expensive when valued on (GAAP) net income. Even with a 31%-sales-growth quarter under its belt now, that seems really expensive to me.

Congratulations, therefore, to those who were happy to pay up for quality and are reaping the rewards in the form of Axon's amazing share price surge today -- but I still won't be buying Axon stock myself.