TASER shares today trade at their lowest levels of the year. There's a reason for that. TASR data by YCharts.

"TASER Reports Record Quarterly Revenue of $50.4 million."

That's how stun-gun maker TASER International (NASDAQ:AAXN) led off its earnings release Tuesday. And suffice it to say, you know a stock's in trouble when it's scheduled to report "earnings" one day but instead does the equivalent of shouting, "Hey, guys! Take a look at these spiffy revenues!"

So if you were looking at the ticker tape on CNBC yesterday and wondering why TASER stock had just taken a 12% tumble -- that right there was your first clue.

The bad news
Announcing fiscal Q3 2015 results Tuesday morning, TASER reported:

  • The aforementioned "record" revenues of $50.4 million, a 14% increase over Q3 2014 revs.
  • Gross margins down 300 basis points to 61.7%, "mostly" due to the fact that TASER's red-hot Axon on-body police cameras, which have been selling briskly, earn lower margins than the Taser-brand stun guns that made the company famous.
  • Operating profit margins down nearly 15 full percentage points, to 13.3%, thanks both to lower gross margins and rapidly growing costs for selling, general, and administrative spending and research and development.
  • On the bottom line, a mere $0.03 earned per diluted share -- an 89% year-over-year drop.

If you'll forgive the bluntness, these results were uniformly horrible and go a long way toward explaining why investors sold their shares in droves Tuesday.

Yet the news was not all bad.

The less bad news
Take free cash flow, for example -- in my view, a better way of valuing companies on the actual cash profit they produce than you get from GAAP financials alone. TASER generated a whopping $17.3 million in positive free cash flow last quarter, which was nearly 10% more cash profit than it produced in the year-ago quarter, and more than 11 times the company's reported "profit" under GAAP.

Year to date, TASER has generated free cash flow of $26.5 million, putting it on course to generate positive cash profits of perhaps $35.3 million if things keep going as they have been so far this year. With TASER's market cap now reduced to just $1.1 billion after the post-earnings sell-off, that leaves the stock selling for about 32 times this year's likely free cash flow.

Now, this is not a "cheap" valuation by any means. But it's much more attractive than the stock's trailing P/E ratio of 57. And 32 times FCF is not at all an unreasonable valuation, given that analysts who follow the stock, as quoted on S&P Capital IQ, posit a long-term profits growth rate of 30% for TASER.

Long story short, while I don't see TASER stock as cheap enough to recommend it right now, I probably wouldn't short it at these prices, either. With new products ranging from in-car video systems to interview-room cameras to a new and improved "Axon Body 2" camera rolling off its assembly lines, TASER could still be a contender.

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. 299 out of more than 75,000 rated members.

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