Axon Enterprise, Inc. (AXON Quick QuoteAXON - Free Report) has been benefiting from strength across its businesses. Benefits from acquired assets are likely to drive its performance in the quarters ahead.

Headquartered in Scottsdale, AZ, Axon develops and manufactures weapons for U.S. state and local governments, the U.S. federal government, international government customers and commercial enterprises. Focused on global public safety, its suite of products includes conducted energy devices, body-worn cameras, in-car cameras, cloud-hosted digital evidence management solutions, productivity software and real-time operations capabilities.

Let’s discuss the factors that should influence investors to retain the stock for the time being.

Growth Catalysts of AXON

Business Strength: Axon’s TASER segment is thriving on the back of strong demand for TASER devices. Stable demand for virtual reality training services also supports the segment’s growth. The company continues to witness growing popularity for its next-generation TASER 10 products, whose shipment began in first-quarter 2023. Also, growth in cartridge revenues, driven by higher adoption of the TASER products, has been driving the segment’s performance.

The addition of new users and associated devices to the Axon network is aiding the Software & Sensors segment. An increase in the aggregate number of users and average revenue per user, driven by increased adoption of software applications, is also driving Axon Evidence and cloud services’ growth within the segment. Solid professional services revenues associated with new product installations, including Axon Fleet cameras, are also proving beneficial for the segment. 

Axon introduced its next-generation body-worn camera, Axon Body 4, in April 2023. With upgraded features such as a bi-directional communications facility and a point-of-view camera module option, this body camera is generating significant demand, thus bolstering the segment’s growth.

In the past year, this Zacks Rank #3 (Hold) company’s shares have gained 69.5% compared with the industry’s 25.7% growth.

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Acquisitions: Axon has been strengthening its business through acquisitions. Its acquisition of Sky-Hero (July 2023), an innovator in drones and ground-based vehicles, expanded its Axon Air portfolio, which consists of its drone software and hardware portfolio.

In January 2024, the company acquired Fusus, a leader in real-time crime center technology. The buyout will combine Fusus’ real-time situational awareness expertise with Axon's innovative public safety technology, thereby enhancing safety and security for its customers in public places.

In May 2024, Axon entered into a deal to acquire Dedrone, a global leader in airspace security. The inclusion of Dedrone’s advanced airspace technology will boost Axon's capability to enable customers to protect their communities against drone threats and improve response to critical incidents.

Collaborations: AXON remains focused on strategic collaborations with other companies to expand its product offerings and customer base. In June 2024, it entered into a partnership with Skydio (a leading U.S. drone manufacturer) to introduce a comprehensive line of drones in public safety that includes a scalable drone as a First Responder (DFR) solution. 

The offering incorporates autonomous drones, onsite docking stations and integrated flight control solutions from Skydio and real-time operations, real-time crime center capabilities and evidence management solutions from Axon. The combined offering will support Axon’s DFR programs across its customer base and strengthen its market position in this category. In addition, it continues to invest in and support DroneSense, an Axon ecosystem partner and leading provider of drone software.

Headwinds for AXON

Rising Costs: Escalating costs and expenses are a concern for Axon’s bottom line. In 2023, the company’s cost of sales soared 31.8% year over year. Also, in the first six months of 2024, the metric climbed 42.5%. The metric, as a percentage of sales, was 41.6%, up 240 basis points year over year. The company incurred high costs and expenses related to business integration activities, an increase in headcount and higher wages and stock-based compensation expenses. 

The increase in operating expenses has been adversely impacting margins of late. In the first six months of 2024, Axon’s gross margin declined 240 basis points year over year. Despite the recent signs of easing, lingering supply-chain disruptions have the potential to impede the company’s growth. Also, abrupt changes to domestic and international regulations of imports and exports of components in the supply chain are likely to delay final product supplies.

Forex Woes: Axon’s international presence keeps it exposed to the risk of adverse currency fluctuations. This is because a strengthening U.S. dollar may require the company to either raise prices or accept margin contraction in locations outside the United States. Thus, adverse currency movements are a risk.

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