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Are TASER International Investors Coming Late to This Party?

By Rich Smith – Oct 2, 2014 at 12:45PM

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Breaking news of a monster sale turns out to be stale -- and investors are not amused.

No great surprise here for one of the world's topsy-turviest stocks, but this past week has been another rollercoaster ride for investors in TASER International (AXON -0.18%).

What's the fuss at TASER? It's all about the AXON on-body camera. Photo: TASER International.

The maker of the eponymous stunguns, and, more recently, the company that's done the best job of capitalizing on investor interest in the market for on-body police cameras, slid along with the rest of the market last week, and fell to within mere pennies of $15 on Monday. But then a miracle happened -- a well-timed news release Tuesday sent TASER shares soaring as high as $15.95 per share.

If you look at the shares today, however, you'll see that that surge of interest in TASER stock didn't last long. In fact, the stock trades for less than $15 today. So was Tuesday's leap in stock price just a "dead cat bounce?" Or is today's share price -- lower than TASER has traded at since mid-August -- an opportunity to pounce?

Is kitty dead? Will she bounce? Or is she getting ready to pounce? Photo: Wikimedia Commons.

Let's take a look at a few numbers and see if we can figure this out.

TASER today
At first glance, the case against buying TASER stock looks open and shut.

Sure, TASER announced Tuesday that London's Metropolitan Police Service in Great Britain is doubling its original purchase of AXON on-body cameras, and rolling out 1,000 units of AXON to its officers. As TASER boasts, this gives the London Met "the largest body-worn camera pilot program of AXON cameras in the world." And with 31,000 officers serving in the London Met, and nearly 130,000 in the UK as a whole, the opportunities for TASER to expand its British business seem substantial.

On the other hand, TASER itself admits that the London Met contract is not "new" news -- it first disclosed the contract win in an 8K filing with the SEC more than a month ago. This means that analysts have had more than enough time to "bake in" TASER's UK prospects into their projection of a 25% long-term annual earnings growth at the company. The fact that TASER shares today sell for well over 45 times trailing earnings -- even after their sell-off -- suggests that at a PEG ratio of 1.8, TASER shares still look very richly valued indeed.

TASER "tomorrow"
This, at least, is how things look through the rearview mirror of TASER's recent sales achievements. Now let's consider what the future must look like -- what TASER must do tomorrow, and keep on doing over the many fiscal quarters to come -- to justify its increase in market cap post-Ferguson.

Up until news of Michael Brown's shooting in Ferguson, Mo., on August 9, investors weren't giving TASER a whole lot of credit for its AXON camera business. As of August 8, the company sported a market capitalization of just $650 million, which worked out to a valuation of about 4.4 times annual sales (and 36.5 times earnings).

Today, TASER sports a market cap of $770 million. This suggests that investors now expect TASER to sell about $27.3 million (the $120 million in "extra" market cap, divided by a valuation of 4.4x sales) more merchandise annually than it was able to sell before on-body police cameras began attracting all the media attention. Is that reasonable?

The final analysis
As Yogi Berra once opined, "it's hard to make predictions, especially about the future." But here's how you can test the assumption: At currently advertised prices, TASER is selling its AXON on-body cameras for anywhere from $399 to $599 -- call it $500 per unit to keep the math simple. To grow its sales $27.3 million annually, therefore, TASER must sell about 54,600 more AXON units per year than it's currently selling. (That's assuming, as seems reasonable, that investors bid up TASER shares in hopes that the company will sell more of the AXON on-body police cameras now -- and not just suddenly start selling more stunguns for no reason in particular).

I ask again: Is that reasonable? Is it achievable?

Since its introduction in 2008, TASER has only sold about 20,000 AXON units worldwide. That's 20,000 units in six years, or fewer than 4,000 units per year. So for TASER's new and improved market capitalization to be justified, it looks like the company needs for Ferguson to spark about a 13-fold increase in its rate of AXON on-body camera sales over annual average sales pre-Ferguson.

Personally, I think AXON is a great product, and it probably will be a hot seller post-Ferguson. But a 13-fold increase?

That's asking a bit much.

And if TASER can't sell 50,000 odd cameras a year? Well, then it's just going to have to sell a lot more of these things instead. Photo of the TASER X26 stungun from TASER.


Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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