Axon: Ecosystem Expansion Continues Amid Geopolitical Tensions

Yahoo

21-03-2025

In my previous article about Axon (NASDAQ:AXON), I discussed the Axon ecosystem, making it a leader in public safety technology, often considered by many as the Apple of law enforcement.
However, in mid-February, Axon's shares took a hit when questions arose over its decision to terminate a partnership with Flock Safety. This collaboration, intended to enhance Axon's Automated License Plate Recognition capabilities, was initially celebrated as a strategic way to expand Axon's reach through third-party innovations.
By dissolving the partnership, Axon may now face Flock Safety as a competitor. This sudden split prompted a downgrade from Northcoast, with analyst Keith Housum noting that ending the Flock deal could limit Axon's immediate upside. Investors reacted sharply, sending shares lower.
Yet just a week later, Axon's earnings report revealed no fundamental concerns. The company beat estimates, delivering 33% year-over-year (YoY) revenue growth and a 121% YoY increase in EPS. Net revenue retention climbed to 123%, underscoring Axon's success in upselling and cross-selling within its ecosystem. Many law enforcement agencies transition from basic Evidence.com usage to higher-tiered solutions that include AI-enabled transcription, advanced analytics, and real-time situational awareness. These expansions drive recurring revenue upward and deepen Axon's ecosystem advantage, demonstrating that once customers come on board, they often continue adopting additional features. Axon also recorded its 12th straight quarter of GAAP profitability and ended the period with $10.1 billion in future contracted bookings and provided full-year 2025 revenue guidance that exceeded Wall Street's expectations.
In this article, I'll explore Axon's evolving technology ecosystem and examine why geopolitical tensions have not derailed Axon's long-term potential.
Axon's primary strengths have come from its integrated ecosystem, centered around its digital evidence management platform, Evidence.com, its industry-leading body-worn cameras, and new technologies such as drones and the innovative Draft One drone solution.
Originally known for its Taser products, Axon rapidly expanded into body cameras. These cameras are considered best-in-class and are deeply embedded in policing operations worldwide, creating high switching costs for customers. The cameras serve as the eyes and ears of law enforcement, capturing extensive audio and video data.
Police officers themselves often request these cameras because they offer protection against false accusations. CEO Rick Smith recounts an officer's experience:
I had a police officer tell me once he was accused of raping a subject in the back of his car. He had the body camera on the whole way back to the police precinct. Think about what that did. Think about what that saved him from having to try to disprove what otherwise could have been unprovable. Police officers get accused of all sorts of terrible things. And look, a very, very small percent of the time police somebody does something terrible. But this camera, if you're doing the right thing, it protects you from all the nasty, terrible things people might accuse you of having done.
This is how Axon initially gained traction. Today, it's far more than just a body-camera company. Its robust ecosystem and subscription-based software model have transformed Axon into a free cash flow (FCF) machine. Evidence.com is the cornerstone of this ecosystem, integrating seamlessly with Axon's many offerings. Rick Smith mentioned in the fourth quarter 2024 earnings call that the company has more than 1 million users of our software solutions, spanning evidence management, real-time operations, productivity, and yes, artificial intelligence. We understand the interconnection of advanced software and hardware (). This is where we differentiate ourselves with our customers.
As Axon's product lineup expands, so do switching costs. The network effect around Evidence.com is another advantage: the more law enforcement agencies that utilize the platform, the more digital evidence (body camera footage, written reports, drone footage, etc.) is uploaded, enhancing its overall value.
Axon has also seen notable success with its subscription approach, which has driven revenue growth. Since 2021, services have grown at a 50% CAGR, while products have grown at only 26%. Although new Taser models remain supply-constrained (indicating strong demand), the services side faces no such limitations and surpassed $1 billion in annual recurring revenue in 2024, bringing higher margins, too.
Moreover, local governments are expected to increase their 2025 public safety budgets, especially for AI and other emerging technologies, which fits neatly with Axon's AI-driven Draft One initiative.
Source: Axon Investor Deck
Axon's Draft One technology dramatically reduces administrative workload for officers by automating tasks such as drafting initial police reports, real-time language translation, and efficient sorting through extensive video footage, drastically reducing administrative burdens and effectively increasing officers' active duty time. On average, police officers spend 40% of their working day on administrative tasks like report writing. Axon's AI solutions cut this time in half, enabling officers to dedicate significantly more of their shift to active policing duties. This improvement translates to an effective increase in manpower for police departments.
Axon continues launching new offerings, such as drones for first responders. I am glad to see progress on this since I discussed it in my previous article. Recently, the Campbell Police Department in California received FAA approval to use Axon's Dedrone to operate missions at night without requiring visual observers. This allows drones to deploy 24/7 as soon as 911 calls come in, providing timely situation assessments.
Source: Axon Investor Deck
Since my previous update, Axon has expanded its total addressable market (TAM) by $52 billion, bringing it to $129 billion overall. One of the biggest jumps is in enterprise clients, including private security, corporate campuses, correctional facilities, and even educational institutions. The enterprise segment is particularly promising because of its potential for large-scale deployments. Private security firms can equip their staff with Axon body cameras, relying on Evidence.com to store and manage video evidence in a secure, cloud-based environment.
Demonstrating this potential, Axon recently signed the biggest deal in company history with a global logistics provider. Meanwhile, corrections departments face overcrowding, staff shortages, and rising scrutiny over inmate conditions. Body cameras and facility-wide systems can reduce violence and provide transparent evidence during disputes. Several states have required correctional officers to wear body cameras while on duty.
International business is another major driver of Axon's TAM. International sales already account for a growing portion of Axon's revenues, and the international pipeline, according to CEO Rick Smith, is bigger than just the United States. Demand from countries modernizing their public safety infrastructure fuels interest in body cameras, Tasers, and digital evidence solutions. Nordic countries, for instance, have shown strong interest in the new Taser 10, seeking a non-lethal option to address rising crime rates without adopting a firearm culture. Smith explained:
Keep your eye on the Nordic countries. They are doing fantastic work on Taser weapons. I think they're going to play a key role when we talk about making the bullet obsolete. I think the Nordics are going to lead the way. Well, to be honest, they've got a history of being very tranquil countries, but now they're dealing with these massive immigration problems that are spiking crime, spiking violence, but they're not gun cultures, right. So even the police themselves are like, they're generally unarmed, but they need something. And so the Taser for them is a great option. They don't want to have to go up to suddenly be carrying guns in their daily duty. And the new Taser ten is a game changing option for them.
Of course, increased geopolitical tensions and trade disputes can pose some risks. One scenario involves a broader boycott of U.S. goods, however, these are typically consumer-focused, and I believe public safety equipment like Axon's would remain unaffected for now. If tensions do escalate and governments begin resisting Axon due to data security concerns, it could create headwinds for the company. Still, because international revenue constitutes only about 15% of Axon's total, near-term impact appears limited. I view this as unlikely at present, but I continue to monitor the situation.
Another issue is the ongoing trade war between the United States and other countries, which could present additional hurdles to Axon's international expansion. Most of Axon's international customers are government authorities, though, which makes tariffs less disruptive. Tariffs are paid by the importing country's purchasing agency to its own customs authority, meaning the money essentially remains within the same government. From a tariff standpoint alone, I do not foresee significant disruptions to Axon's operations.
The S&P 500 briefly entered a correction due to President Trump's tariff threats, which led to retaliatory measures from targeted countries, increasing uncertainty around trade policies and causing market volatility. This eroded investor sentiment and heightened recession fears. Nevertheless, Axon's stock proved relatively resilient. (Although shares dropped significantly in February because of the Flock partnership termination, geopolitical tensions have not triggered a similar decline.)
In fact, Axon maintains a strong balance sheet and a growing stream of recurring revenue, supported by consistent revenue growth, improving profitability, and increasing free cash flow. The software side of the business offers higher margins than hardware, elevating Axon's overall margin profile and making a premium valuation somewhat justifiable.
However, Axon does trade at a relatively high valuation. Its price-to-sales (P/S) ratio is around 20.5x, and its forward P/S is roughly 16x. The forward price-to-earnings (P/E) multiple sits near 95x, yielding a PEG ratio of 3.88xsteep by most measures. Axon also lacks a perfect public-market comparison, since no other company matches its breadth of offerings in public safety.
Another way to assess Axon's valuation is to conduct a discounted cash flow analysis that blends multiple-based and perpetuity growth assumptions. I estimate a fair value of around $472 per share, implying a potential 16% downside from current levels. I lean toward conservative scenarios, given current macroeconomic headwinds.
Source: Author
All these metrics suggest the stock is overvalued, likely a result of investors' overly optimistic view of Axon's shares. While the company has strong prospects for future growth and I believe in its long-term potential, I'm not ready to add more to my position at these prices.
Axon remains a dynamic, innovative business bridging hardware, software, and services in the global public safety and security space. The company's advantages continue to strengthen through AI initiatives, enterprise solutions, and international expansion, all supported by a significant backlog and robust revenue growth.
Still, its share price has historically run high. Even with a nearly 30% pullback from last month's all-time high, it may remain somewhat overvalued. I would prefer to see an additional 1015% decline before increasing my position. Nevertheless, I hold a positive long-term outlook, confident that Axon's growth trajectory remains strong. I plan to hold onto my shares and add more if the stock experiences another significant or unjustified pullback.
This article first appeared on GuruFocus.