Raymond James Upgrades Axon Enterprise Amid Continued Business Shift

Axon Enterprise Inc AAXN continues to shift its business away from a hardware and weapons company towards a cloud-based subscription model and the story is underappreciated by the Street, according to Raymond James.

The Analyst

Raymond James' Brian Gesuale upgraded Axon Enterprise from Outperform to Strong Buy with an unchanged $79 price target.

The Thesis

Axon's evolution has resulted in "considerable success" so far with software revenue sales growing from 2 percent of total sales in 2014 to around 20 percent in 2018, Gesuale said in the upgrade note. The "new and improved" software business is trading at a similar price-to-sales multiple as its Taser business did before changing the company name.

A sum-of-the-parts valuation model might be best to better analyze Axon's stock and the company should be broken into three lines of revenue: 1Axon Cloud, Taser hardware (weapons, body cameras) and connected sensors.

Gesuale says this type of model can better assign more appropriate multiples to different business lines, such as the cloud business at 9.5 times sales which is similar to other recurring software subscription businesses. The hardware business would be valued at 5.5 times, while sensors are assigned a lower multiple of one to two times sales.

The research firm's model assigns a 2021 enterprise value of $2.057 billion for the Taser business, $164 million for the sensors business and $3.53 billion for the cloud business. Applying a 3-percent discount rate generates a discounted 2021 SOTP price of $100 per share, or around 76 percent upside from current levels.

Price Action

Shares of Axon Enterprise were trading higher by 4.6 percent to $60.41 at time of publication.

Related Links:

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Why Axon Shares Got A Shock After The Q3 Print

Photo courtesy of Axon.