Locking in Gains on Another Big Portfolio Winner, and Downgrading Its Rating
We’ll take advantage of short-covering in the shares but recognize longer-term opportunities remain.
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* We're ringing the register on some big gains in Axon, following the post-earnings pop in the shares spurred on by short-covering.
* We'll also lift our Axon price target, but downgrade the shares to a Two rating.
* With our Axon thesis very much intact, here's what could lead us to revisit our price target and rating.
| Symbol | Transaction Type | # Shares Traded | Recent Price $ | Shares Owned After Trade | % Portfolio |
|---|---|---|---|---|---|
AXON | Sell | 123 | 349.50 | 500 | 4.1 |
After you receive this Alert, we will sell 123 shares of Axon Enterprise AXON at or near $349.50. Following the trade, AXON shares will account for roughly 4.1% of the portfolio’s s assets.
Following the market’s strong reaction to Axon’s June-quarter results and guidance we are forced to do some prudent portfolio management given Axon's elevated position size that has emerged. And while we are lifting our AXON price target to $385 from $375, given the amount of potential upside to that revised target we are also downgrading our rating on AXON to Two from One.
Axon's Beat-and-Raise Quarter
Last night Axon delivered a beat-and-raise June quarter, which showed a 35% year-over-year jump in its top line and meaningful expansion in its adjusted EBITDA margin to 24.5%, up from 21.8% in the year-ago quarter. It wasn’t just those year-over-year comparisons that stood out, though. Axon’s sequential revenue improvement, up 9% vs. the March quarter, and 90 basis points of added EBITDA margin did as well.
The increases were fuled by a combination of continued Taser and cloud adoption, all of which helped grow the company’s margins and recurring revenue stream. All in all, the Axon story is tracking very well against the investment thesis that led us to add the shares to the portfolio and stick with them. We see more of the same ahead, especially given the high levels of revenue retention and the continued climb in future contracted revenue (FCD). Exiting the June quarter, FCE stood at $7.35 billion, up from $5.2 billion a year ago, and $7.0 billion as we entered Q2 2024.
Why the Big Pop?
What’s leading to the outsized pop in the shares today, prompting us to take some prudent action, is short-covering, plain and simple. The last short interest report for AXON showed 2.4 million shares were short, and based on their average trading volume that equates to roughly 4.5 days to cover.
More than likely that's why we are seeing an elevated rise in the stock, and we’re taking advantage of that to lock in some big gains on this slice of shares. It also means that in the coming days, we could see the shares feel the pull of gravity and settle back at lower levels. Based on our revised price target, we’d consider revisiting our Two rating below $320.
Potential catalysts that could also lead us to revisit our price target with an upward bias as well as the rating include quicker-than-expected adoption of Axon’s Draft One offering. Draft One is its new AI service that creates the first draft of a police report extracted directly from Axon body camera recording. These and other similar services Axon is deploying should not only spur adoption and stickiness of its higher-margin cloud services, but the productivity savings could result in additional body camera market-share gains.
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(Please note that we are looking to execute these trades at or near the share price mentioned above. Once the trade is completed, subscribers can see the trade's executed price here. Be sure to toggle the chart to sort by Purchase Date.)
At the time of publication, TheStreet Pro portfolio was long AXON.
