On October 1, a caller asked for Mad Money host Jim Cramer’s opinion of Axon Enterprise, Inc. (NASDAQ:AXON), and he replied:
Okay, I happen to like Rick Smith. Anyone who’s watched the show for a couple of decades knows that I think Rick Smith’s great. I do think that there’s actual competition… [for] Axon, and they’ve got a good product, but I have to tell you, when there’s competition, that means there’s going to be gross margin pressure. When there’s gross margin pressure, you can’t have a stock selling for 54 times earnings. So, the answer is I’m taking a breather now on Axon.
You can also check out Cramer’s evolving views on the stock.
Software Growth and a Broader Public Safety Offering
Axon Enterprise, Inc. reported second-quarter revenue of approximately $904 million, up 35% year-over-year. It is worth noting that it is the company’s 10th consecutive quarter recording over 30% revenue growth. Software and services revenue increased 36% to roughly $398 million, while annual recurring revenue reached $1.6 billion. Management raised its full-year revenue growth outlook to 32% – 34%, from 30% – 32%.
The company is also expanding the work its products can handle. Its unified AI platform includes Axon Assistant, which helps users retrieve information and complete tasks across body cameras, mobile devices and evidence-management systems. Axon 911 connects emergency-call information with response and evidence workflows, extending the company’s presence beyond the devices officers carry. These additions give the company more opportunities to sell services across different stages of public safety operations. You can also check out the real cost of Axon’s zero-coupon notes.
Software Margins Face Pressure as the Business Expands
Axon Enterprise, Inc.’s latest results show margin pressure, although the explanation differs from the competitive concern Cramer raised. Second-quarter software and services GAAP gross margin declined to 71.3% from 75.6%. Management attributed the decline to a greater contribution from professional services and the costs of scaling newer offerings.
However, companywide GAAP gross margin remained unchanged at 60.4%, as stronger connected-device margins offset the software decline. The results do not establish that competition has already caused an overall margin contraction.
Nevertheless, the stock carries substantial earnings expectations. The valuation readings placed Axon at approximately 54x forward earnings, compared with nearly 25x for public safety technology competitor Motorola Solutions. Axon’s faster-growing software business helps explain investor interest, but that premium leaves less room for disappointing margins or slower expansion. You also read why the company was S&P’s biggest loser.
Fewer Hedge Fund Holders Along With Meaningful Short Interest
According to Insider Monkey’s database, 53 hedge funds held Axon Enterprise, Inc. in the second quarter, compared with 59 in the preceding quarter. With 693,504 shares, Broadwood Capital was the biggest hedge fund holder in the second quarter. Short interest represented 5.32% of the public float. The decline in fund participation suggests some cooling in institutional interest, while the short position shows that a portion of the market remains somewhat willing to bet against the shares.
Axon is still growing quickly and finding more ways to serve its customers. Cramer’s hesitation concerns what investors are paying for that progress. The next few quarters will give shareholders a better sense of whether the newer services can develop without placing further pressure on the software margins that help justify the stock’s premium.
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