TASR Price Chart

TASER reported earnings last week -- and then it took a tumble. TASR Price data by YCharts.

TASER International (NASDAQ:AAXN) shares sank more than 11% in Thursday trading, then slumped even further Friday (down another 3%) after the maker of stun guns and body cameras reported a big earnings... beat.

That's not the way you'd expect that sentence  to read. Ordinarily, investors punish the stock of companies that miss earnings and reward those that exceed analyst expectations. Then again, at a share price of more than 50 times the earnings it's produced over the past year, and 7.5 times trailing sales, TASER International is no "ordinary" stock.

With TASER shares down a further 5% in early Monday trading (if you're counting, that makes 19% worth of declines since earnings day), now might be a good time to take a closer look at what TASER actually reported last week -- and see if investors might be overreacting to the news just the tiniest bit. So, let's do that.

What TASER said
In TASER's Thursday earnings report, the company reported that it:

  • Grew sales 26% in comparison to Q2 2014, reporting $46.7 million in sales for its fiscal second quarter 2015.
  • Added 340 basis points to its gross profit margin, which hit 65.8% in the quarter.
  • And delivered quarterly profits per diluted share of $0.11, up 57% from last year.

Drilling down further, we find that weapons sales (i.e., actual "tasers") grew 16% year over year, while sales of Axon on-body police cameras nearly doubled, from $4.4 billion to $8.9 million. What's more, the company took in $30.6 million in new orders for Axon cameras and Evidence.com data storage subscriptions (revenues from storing the video generated by the Axon cameras). That number was up 170% year over year, indicating strong growth in a high-margin business.

All of which makes it sound like Q2 was a pretty good quarter for TASER. And when you consider further that the company's numbers were ahead of the consensus for what it was "supposed" to report, investors' negative reaction to the news seems all the more strange.

At least... it seems strange until you realize it's not the news that investors were reacting to at all -- it was the guidance.

What TASER also said
Discussing TASER's prospects in an after-earnings conference call, company CFO Dan Behrendt noted that at least "some deals" that were expected to close in Q3 actually made it onto the books in Q2 -- helping TASER to deliver a big earnings beat. The flip side of this good news, however, is that those sales will not now appear in Q3's results, and "as a result [TASER expects] Q3 results to come in close" to what the company earned in Q2.

That shouldn't be a huge problem on earnings, given that analysts quoted on Yahoo! Finance are looking for TASER to produce $0.09 per share in profits. A Q3 number "close to" the $0.11 that TASER earned in Q2 should exceed estimates and please investors. What may be a bigger problem is the fact that these same analysts will be looking for $48.3 million in sales in Q3. But TASER made only $46.7 million in sales in Q2. So, in the case of revenues, "close to" may not win TASER a cigar.

What TASER didn't say -- but should have
Should TASER deliver just $46.7 million in sales in Q3, that would represent only 5% sales growth year over year, and a steep slowdown from the 26% sales growth pace set in Q2.

But what if you ascribe a Q3 sales slowdown entirely to the fact that some sales closed in Q2 rather than Q3? Does that make the sales picture any prettier? Well, average out the two quarters' results by dividing last year's Q2 and Q3 sales ($81.5 million) into this year's likely Q2 and Q3 sales ($93.4 million). What you get then is about a 15% rate of year-over-year sales growth for the combined period -- Q2 and Q3 2014 to Q2 and Q3 2015.

Honestly, 15% sales growth is a little slow for a stock valued at more than 50 times earnings. For that matter, though, even the 26% growth in sales seen in Q2 was a bit slow. For TASER stock to go up instead of down after earnings, the company probably needed to promise even faster sales growth in Q3 than the already blistering pace set in Q2.

The fact that TASER failed to do that is why the stock sank last week and is continuing to sink this week -- and why I strongly suspect it will sink even further in the weeks to come.

Rich Smith does not own shares of, nor is he short, any company named above. You can find him on our virtual stockpicking service, Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 327 out of more than 75,000 rated members.

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