Axon May Be Trading Off, But We Like the Stock
The company continues its shift to the higher margin Software & Services business.
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* We are lifting our Axon price target to $375 from $330 and reiterating our One rating.
* Driving the company’s beat and raise March quarter was the continued mix shift to the higher margin Software & Services business.
* Axon expanded its total hardware and software addressable market to $77 billion from $63 billion, which includes its announced acquisition of drone company Dedrone.
Following Axon’s beat and raise March quarter, we are boosting our price target on the shares to $375 from $330 and reiterating our One rating. Both reflect the continued positive mix shift toward the higher margin Software and Services business, which posted gross margins near 75% vs. ~47% for its Sensors & Other Segment and ~62% for the Taser business.
Annual recurring revenue continued to climb reaching $825 million exiting the March quarter, up dramatically from $551 million in the year-ago quarter and $732 million in the December quarter.
During the company’s earnings call, management said that it now sees the company’s total addressable market at $77 billion, up from $63 billion previously. This adjustment includes the impact of recent acquisitions but also the announced one for Dedrone, which accompanied last night’s earnings release.
Dedrone is a leading drone company that counts airports and federal defense agencies as existing customers. This along with the prior acquisition of tactical drone company Sky-Hero lays the groundwork for another leg on Axon’s stool, and one that should feed its Cloud and Services segment and recurring revenue stream.
When it comes to Axon and its position in the portfolio, the strong backdrop of public safety spending continues to support our thesis on the shares as does the continued growth in the cloud business. If we start to see signs that the growth rate in that business is slowing significantly, it would give us a reason to reconsider owning AXON shares in the portfolio. We do not see that on the horizon.
AXON shares have support at the $310 level, and should they hold that line, new members should consider picking some shares up. If, however, we see AXON shares fade to support at the 100-day moving average near $284, that would be a compelling place to add shares.
Axon’s March quarter and outlook
Total revenue of $460.7 million was up 34% year over year and well ahead of the $441.6 million market forecast due to rising sales in Axon Cloud & Services (+51.5% year over year), as well as Taser (+33%) and body cameras (+14.3%). Axon’s non-GAAP gross margin of 63.2%, up 330 basis points year over year, also topped the consensus forecast as did its non-GAAP operating margin. Adjusted EBITDA during the quarter hit $109 million, up significantly compared to year-ago levels and well ahead of the $90.8 million market consensus.
On the strength of its businesses and the more than 47% year-over-year increase in its total company future contracted revenue to $7.0 billion, Axon boosted its 2024 revenue and EBITA forecast. For its top line, the company now sees $1.94 billion-$1.99 billion, up 26% year over year at the midpoint and up from its prior guidance of 20% to 24%. The continued strength in its Cloud business and the positive impact on overall margins explains the lift to Axon’s 2024 EBITDA guidance to $430-$445 million.
So why are Axon’s shares trading off?
When we look at the company’s guidance, even though it’s been lifted it implies an adjusted EBITDA margin of 22% for this year, pretty much the same as its prior outlook. The fly in the ointment, however, is that it suggests the company’s EBITDA margin will soften some compared to the 23.7% level achieved in the March quarter.
Our take on this is the management team is once again being overly conservative in its guidance given the mix shift that has occurred toward Cloud that should continue. We can understand Axon needs to add some additional capacity to meet Taser demand and the integration of recent acquisitions can be a headwind. All in all, however, our thinking is Axon’s management is setting itself up for some additional beat and raise quarters.
At the time of publication, TheStreet Pro Portfolio was long AXON.
