Red-Hot Axon Stock Hit a Brick Wall, But It’s Just a Healthy Valuation Reset

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Surely you saw this coming.

Law enforcement technology solutions provider Axon (NASDAQ: AAXN ) recently reported solid second quarter numbers which topped revenue and earnings expectations and included continued robust revenue growth and margin expansion.

But, the company failed to lift its full-year revenue and profit guide. AAXN stock, which had rallied 20%-plus since the previous earnings report, needed a guidance lift to support the rally.

AAXN stock didn't get that guidance lift, and as such, the stock dropped more than 15%.

But, this is nothing to be terribly concerned about. The post-earnings selloff in AAXN stock is simply a valuation reset and nothing more.

The numbers in the quarter were still very good, and the long-term growth narrative of using technology to transform law enforcement agencies globally remains intact. As such, once this selloff shakes out the weak hands, there will be an opportunity to buy the dip.

But, patience will be rewarded here. There's no need to buy the dip here and now. AAXN stock got way ahead of itself at $70. I think this stock finds a fundamentally supported floor around $50, and believe that is the time to buy the dip.

Here's a deeper look.

Axon Earnings Were Good But Not Good Enough

Axon's second quarter earnings report was good.

Revenue growth was 25%, only a notch slower than last quarter's 28% growth. Cloud revenue growth actually accelerated sequentially from 72% to 76%. Software and services annually recurring revenue growth remained robust at 70%.

Margins across the board headed higher. Overall, the quarterly numbers were more of the same from this red-hot company: big revenue growth and big margin expansion.

But, the revenue growth wasn't big enough, and the margin expansion wasn't big enough, either.

Revenue growth for the full year is still expected to be just 18-20%. That guide implies a meaningful slowdown in revenue growth going forward, seeing as revenue growth has trended in the 25%-plus range year-to-date.

Moreover, adjusted EBITDA margins expanded 360 basis points year-over-year in the quarter. On its own, that is big expansion. But, margins are up 590 basis points YTD. Thus, relative to the first quarter, second quarter adjusted EBITDA margin expansion of 360 basis points is underwhelming.

Overall, while Axon's second quarter numbers were good, they weren't good enough to support AAXN stock at $70.

Axon Stock Has Healthy Long-Term Upside

Although the second quarter numbers weren't good enough to support AAXN stock at $70, they are good enough to support the stock at $50.

Axon is supported by one of the most promising long-term growth narratives in the market. By expanding into body cameras, dash cameras, cloud solutions, and much more, Axon has significantly expanded its addressable market and gone from "company that sells tasers" to "company that is helping modernize everything about law enforcement."

This market is huge. Management pegs the global addressable market at $6.5 billion. Axon is only tapping a small portion of that massive TAM.

Revenues this year are projected to be a hair over $400 million. Thus, so long as Axon continues to execute on its global growth strategy and builds on its currently robust product road map, this is easily a company with 15% revenue growth potential in the long term.

In a decade, then, Axon could reasonably own 20% of this market with $1.4 billion in revenue. By that time, operating margins should trend toward 30% as the company's high-growth Software & Services business turns big revenue growth into healthy OPEX leverage.

Putting it all together, I reasonably think Axon's long-term growth narrative supports earnings power of $6 per share in a decade. A growth-average 20X forward multiple on $6 implies a nine-year forward price target of $120. Discounted back by 10% per year, that equates to a year-end price target for AAXN stock of $55.

Bottom Line on AAXN Stock

Even as a long time bull, I knew that AAXN stock was headed for a brick wall when it was trading up above $70.

AAXN stock hit that brick wall. But, this isn't anything more than a healthy valuation reset. As such, once the dust settles, a buying opportunity will present itself in AAXN stock.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities but may initiate a long position in AAXN within the next 72 hours.

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The post Red-Hot Axon Stock Hit a Brick Wall, But It's Just a Healthy Valuation Reset appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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