New Axon Price Target as Momentum Investors, Short Sellers Clear Out

Coming off of the market’s drubbing on Thursday, which pulled Axon’s (AXON) shares lower ahead of Thursday night’s earning report, we are seeing the shares pulled lower yet again on Friday following a top- and bottom-line shortfall relative to market forecasts.

Axon management also revised current quarter expectations lower pointing to a total of $130 million in program delays associated with its Federal Dedrone business. Regardless of the reason, especially in a market flashing Extreme Fear, the combination of a quarterly miss and revised lower outlook is going to pull the shares even lower for any company.

This is where the higher beta associated with Axon’s shares, near 1.5, is going to work against us as will the level of short interest in the shares. As of mid-October, that level stood at about 4 million shares which, based on average trading volumes, means about four days or so to cover. On Thursday, 3.6 million AXON shares traded hands amid the market fall and it’s fair to say Friday’s trading volumes will be high as well. This and the sharp move from Axon’s closing price near $424 on Wednesday night to the current share price suggests we are going to see quite a bit of that short interest come off.

As that happens and the market finds it footing, value investors are likely start circling the shares even though we are seeing consensus EPS figures come down. Compared to the 2026 to 2029 figures as of Thursday night’s market close that we shared in our new and improved Portfolio Table early on Friday morning, the latest consensus figures are as follows:

2026: $7.18

2027: $9.42

2028: $12.56

2029: $17.49

Remember that behind these figures is Axon’s future contracted revenue of $15.8 billion. Some may add management’s reiteration of its 2028 target of $6 billion in revenue and a 28% adjusted EBITDA margin, but we’re not going to give management full credit on that given the quarter’s miss.

But here’s the thing: Based on those updated figures and the drop in the shares on Friday morning, they are trading at a PEG ratio of 1.0-times based on revised 2027 EPS. Could we see those multi-year consensus EPS figures, which are down about 10% across the board for 2027 to 2029, come down a bit further as more Wall Street analysts publish their Q3 2026 assessment?

Probably, and the same goes for the consensus price target.

But even though we will cut our AXON price target to $600 from $700, our plan will be to let the trading volume clear out momentum investors and short sellers, and as the shares settle out, we’ll use the outsized move down in the shares to improve our cost basis.

Because we are likely to get questions on our new $600 price target, it equates to a 1.8-times PEG ratio on revised 2027 EPS expectations and 0.8-times using the new 2028 figure. So far, TD Cowen has trimmed its AXON target to $650 from $800, and JPMorgan reset its target for the shares at $640 from $755.

And to be clear, given what we saw with the reported quarter, Axon management will need to earn some credibility back, but so long as we continue to receive signals that point to public safety and other markets adopting hardware and services that it provides, we’re inclined to be patient.

It also means we will remain focused on Axon’s future contracted revenue metric. Should we see that flatten or contract for two consecutive quarters, that would give us a reason to revisit the shares’ place in the Portfolio. On the other hand, should that figure continue to climb, it will lead EPS figures higher and most likely expand the PEG ratio multiple. As a frame of reference, a PEG ratio of 2.0-times on that 2027 EPS figure above yields a $650 price for Axon shares.

Axon’s September Quarter

Axon reported September quarter results that came up short of expectations on both the top and bottom lines. Revenue rose 28% year over year to $909 million, roughly $26 million below consensus, while non-GAAP EPS of $1.72, up from $1.24 a year ago, missed by $0.17. Behind that quicker pace of bottom-line growth was the 33% move in adjusted EBITDA. which equated to a 25.9% margin for the quarter up from 24.9% in the year-ago quarter.

The driver behind that was the accelerating mix shift toward the higher margin Software and Sensor business that accounted for 48% of Q3 2026 revenue compared to $43% in the year-ago quarter. The continued step up in that business also explains the quarter-over-quarter gains we are seeing in average recurring revenue, which hit $1.75 billion in the reported quarter, now just under half of the company’s revised 2026 top-line guidance.

It’s also behind the continued lift in the future contracted revenue metric that, in our view, brings longer-term visibility. Hitting $15.8 billion exiting Q3 2026 versus $15.1 billion at the end of Q2 2026 more than offsets the timing issue that impacted Q3 2026. Between 20% and 25% of that future contracted revenue is expected to be fulfilled over the next 12 months. During the earnings call, management tipped that federal bookings are running more than five times last year’s level, and bookings for newer products have more than doubled to over $1 billion and that is expected to step up again in the current quarter.

That timing shortfall that impacted Axon’s quarterly results was attributed to about $30 million federal Dedrone counter-drone deployment. We won’t get into if it had landed what that would have meant, but simple math tells us that the possibility would have more than covered the revenue miss. Management pinned the delay on federal procurement and the government’s fiscal year ended September 30, the election cycle slowed decisions. As management explained on the earnings call on Thursday night, these deployments require site preparation, export permitting and acceptance testing. In other words, timing issues can have a cascading effect on deployment.

Segment Review

As we alluded to above, Software & Services was once again the star, with growth accelerating to 43% and revenue reaching $437 million, approaching half the total. Newer offerings, including real-time operations, Axon Records, AI, Axon 911 and Dedrone software, reached a run rate of nearly $500 million, more than double last year, and AI annual recurring revenue topped $100 million. Connected Devices revenue rose 16% to $472 million, led by a 106% jump in Platform Solutions to $125 million as Dedrone posted its second-best quarter ever. TASER revenue slipped about 2% to $233 million on lower TASER 7 sales, but management expects growth to resume in Q4 and sees TASER as a double-digit grower.

While adjusted EBITDA margins rose year over year, Axon’s gross margin for the quarter fell to 59.2% from 62.7% a year ago on a heavier mix of lower-margin counter-drone hardware, higher memory costs and new product categories that are still scaling. Not surprisingly, management discussed the impact of higher memory costs, framing it as a 50-basis point headwind to adjusted EBITDA margin this year, but warned that impact will be higher in the coming quarters. To offset it, Axon is leaning on pricing as well as continuing to focus on growing the higher margin Software and Services business. Given the sticky nature of that business, that’s just fine with us as it should help keep Axon’s retention rates at very high levels.

Guidance, 2027 and Beyond

For the current quarter, Axon guided revenue to $990 million to $1.01 billion, below the $1.07 billion consensus, with adjusted EBITDA of $245 million to $250 million. That implies 2026 revenue of $3.61 billion to $3.63 billion, or roughly 30% growth, down from the 32% to 34% guided in August.

What changed?

Axon management fingered the change to three federal Dedrone deployments totaling about $130 million in revenue. That includes the $30 million that slipped from Q3 plus $100 million that had been in the prior forecast for the current quarter. That is leading management to reset how builds its forecasts and guidance and sounds to us that means leaning more on definitive shipping and installation dates, especially for Dedrone.

What that could mean is that as counter-drone becomes a bigger piece of the backlog, revenue from these hardware-heavy deals that will be recognized all at once on delivery, could mean lumpier quarters for the Connected Devices margins. To us this suggests a better view on backlog could be a trailing two- or three-quarter view. When we do that, there is little question about the upward direction over the last three and half years.

Axon will issue its 2027 outlook in February, but management reiterated its 2028 targets of $6 billion in revenue and a 28% adjusted EBITDA margin, along with a 30%-plus five-year revenue growth rate.

Skydio and Connecting the Drone Dots

Alongside the quarter’s results, Axon announced it would invest an additional $1.2 billion in Skydio at a $5.2 billion pre-money valuation, taking Axon’s fully diluted ownership to 37%. The investment will be funded roughly 60% in cash and 40% in stock, with part of the cash coming from the $1.15 billion convertible notes Axon issued during the quarter. Skydio serves more than 1,500 public safety customers and expects roughly $1 billion in bookings this fiscal year. Third party estimates peg the U.S. and Canadian drone-as-first-responder market at roughly $13 billion.

What this means is that Axon becomes Skydio’s exclusive public safety distributor in the U.S. and Canada. That revenue will be recorded in the Software & Services segment at its channel margin, which implies very favorable incremental margins. Axon shared that full ownership of Skydio isn’t on the horizon anytime, partly because the company faces a heavy investment cycle to onshore its supply chain. Strategically, the deal fills a key gap. Dedrone protects agencies from threats in the sky, and Skydio puts Axon’s drones in the air, so Axon now covers both sides of the airspace. That means adoption of Skydio should be a pull through for Axon drones as well as related connected Software & Services.

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At the time of publication, TheStreet Pro Portfolio was long AXON.