AXON stock (AXON) has achieved remarkable gains lately, rising 171% over the past year. Its most recent Q3 results, in particular, were quite impressive, sending shares soaring. Investors’ enthusiasm seems well-deserved, given Axon’s transformation from a company developing Tasers to a full ecosystem provider for law enforcement, including its booming cloud business. Nevertheless, following its explosive gains, AXON is one of the most expensive stocks in the S&P 500. For this reason, while I remain optimistic about AXON’s long-term potential and hold shares, I remain neutral on the stock’s current valuation.
Axon’s Incredible Revenue Growth
Let me start with Axon’s revenue growth to provide a sense of just how incredible its momentum has been lately. In Q3, Axon—a manufacturer and seller of conducted electrical weapons for personal defense—revenue jumped by an impressive 32% compared to last year, hitting a record $544 million. Notably, this was AXON’s 11th consecutive quarter of revenue growth that exceeded 25%, with all of the company’s segments contributing to this result.
Specifically, revenues from the TASER segment grew by 36%, driven by tremendous demand for TASER 10 devices and related services. Another highlight is that the TASER segment marked the strongest sales growth in over two years despite being considered quite mature at this point. In addition, Axon Cloud & Services saw a similar 36% year-over-year growth, supported by the continued expansion of Axon Evidence and new customer adoption of its cloud offerings.
Overall, both segments benefited from AXON’s relentless focus on innovation and expanding its portfolio of services. In AXON’s Q3 shareholder letter, management noted that growing demand for cloud-based products like Draft One, Axon Body 4, and real-time video management features has helped significantly boost revenue and strengthen customer loyalty. This isn’t surprising, given Axon’s software suite allows streamlined workflows for law enforcement and public safety agencies. Evidently, AXON’s net revenue retention reached 123% in Q3, even expanding compared to prior quarters.
Profitability on the Rise
Axon also demonstrated remarkable progress across its profitability metrics. Its adjusted EBITDA margin reached 26.7% in Q3, the highest level the company has recorded in three years. This margin expansion was largely driven by operating leverage, as Axon scaled operations while maintaining expense control. High growth and high margins typically don’t go hand in hand, as achieving rapid growth often requires substantial spending. Thus, seeing AXON deliver strong revenue growth while keeping expenses in check and expanding margins is truly remarkable.
A major factor driving profitability I think is worth pointing out is Axon’s high-margin cloud segment. For context, the Cloud & Services adjusted gross margin was 75.2% in Q3, registering a 150 basis points expansion from 73.7% last year. I believe this accurately reflects the growing significance of recurring cash flow via Axon’s SaaS-like subscription services, benefiting from scalability and high customer retention. In fact, as the cloud segment continues to become a more notable chunk of total revenues over time, Axon’s profitability will likely further improve.
Has AXON’s Valuation Reached Frenzied Levels?
As much as I’ve believed in Axon’s story and held shares for some time, it’s hard to ignore the fact that the stock’s valuation has reached staggering heights. After its prolonged rally, AXON is trading at 21.9 times expected sales this year, making it the stock with the 6th most expensive price-to-sales (P/S) multiple in the S&P 500. From an earnings perspective, AXON is priced at a steep 115 times this year’s expected EPS. Even assuming strong growth in earnings moving forward (i.e., 20%-30%+), such a multiple leaves little margin for safety.
It’s undeniable that Axon is set to benefit from several tailwinds, including rising law enforcement spending globally. Also, AI-powered tools, like introducing its latest product, Draft One, which has already revolutionized incident reporting, add to the long-term growth story. However, much of this future upside seems already priced in, leaving limited short-term appreciation potential. Therefore, I will continue holding my existing shares but stop adding to my position until valuation levels provide a more compelling entry point.
Is AXON Stock a Buy, According to Analysts?
After AXON’s significant surge in share price, Wall Street seems to agree that the stock may have limited upside potential going forward. AXON may continue to feature a consensus rating of “Strong Buy,” with recent analyst ratings consisting of 10 Buys and one Hold rating over the past three months. However, at $553, the average AXON stock price target implies a 7.1% downside potential.
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Final Thoughts
Axon’s Q3 results again highlighted its remarkable growth trajectory and lasting margin expansion, cementing its position as a leading law enforcement technology provider. However, given the current valuation levels, much of the stock’s future potential appears to have already been priced in. With AXON now being one of the most expensive stocks in the S&P 500, there seems to be no margin of safety for new investors looking to initiate a position in this name. Therefore, while I remain optimistic about the stock’s long-term prospects, I remain neutral and will refrain from adding to my current position.
