AI And Global Expansion Propel Unprecedented Growth In Aerospace & Defense Sector

Key Takeaways

• Axon's investment in AI and international expansion indicate strong future growth catalysts, enhancing productivity and diversifying market risk.
  
• Strategic focus on real-time operations and development in the drone sector suggests potential for new revenue streams and product portfolio diversification.
  
• Axon Enterprise faces risks including dependency on long-term contracts, challenges in maintaining innovation leadership, geopolitical and regulatory impacts on international expansion, execution risks in acquisitions integration, and competitive pressures from AI commoditization.

Catalysts

Develops, manufactures, and sells conducted energy devices (CEDs) under the TASER brand in the United States and internationally.

• Axon's aggressive investment in artificial intelligence and the launch of AI services such as Draft One suggests a strong future growth catalyst, potentially impacting revenue and net margins by streamlining police report drafting processes and enhancing overall productivity.
  
• The significant increase in international bookings, which are up 100% year-to-date, points to expanding market penetration and revenue growth opportunities outside of the U.S. This expansion can substantially increase Axon's revenue base and diversify market risk.
  
• The focus on real-time operations and the integration of Fusus into Axon's product offerings could revolutionize real-time communications for customers, leading to increased sales in software solutions. This strategic focus might enhance revenue from software and services segments.
  
• Developments in the drone and robotic security sector, including partnerships and acquisitions, present new revenue streams and diversification of Axon's product portfolio, potentially increasing revenue and reducing dependence on existing product lines.
  
• Record second quarter revenue and bookings highlight operational efficiency and market demand for Axon's products, which, coupled with the raised guidance for the full year, suggests a strong growth trajectory and underlines the company's ability to increase earnings and margins.

Assumptions

• Analysts are assuming Axon Enterprise's revenue will grow by 21.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.1% today to 9.1% in 3 years time.
• Analysts expect earnings to reach $293.5 million (and earnings per share of $6.17) by about August 2027, up from $290.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $509.9 million in earnings, and the most bearish expecting $166.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 119.2x on those 2027 earnings, up from 97.0x today. This future PE is greater than the current PE for the US Aerospace & Defense industry at 33.1x.
• Analysts expect the number of shares outstanding to grow by 1.09% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.87%, as per the Simply Wall St company report.

Risks

• The reliance on long-term contracts could be a potential risk if economic conditions worsen, affecting municipalities' ability to maintain payments, impacting recurring revenue.
  
• Rapid technological advancements, especially in AI, present an execution risk in maintaining the lead in innovation, which is crucial for their growth and could affect net margins if investments in R&D do not provide expected returns.
  
• The international expansion and reliance on TASER 10 sales outside the U.S. local law enforcement could face challenges due to geopolitical tensions or regulatory changes, potentially impacting revenue growth.
  
• The integration of acquisitions, such as Fusus and Dedrone, and the shift in strategy towards sensor fusion and AI for real-time operations, presents execution risks. Failure to integrate successfully could impact expected earnings from these new ventures.
  
• The commoditization of AI and large language models, as mentioned, could lead to increased competition and pressure on pricing and margins, affecting overall profitability.

Valuation

• The analysts have a consensus price target of $378.0 for Axon Enterprise based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $400.0, and the most bearish reporting a price target of just $335.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.2 billion, earnings will come to $293.5 million, and it would be trading on a PE ratio of 119.2x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $373.07, the analyst's price target of $378.0 is 1.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.