kali9/E+ via Getty Images Axon Enterprise, Inc. (NASDAQ:AXON) reported its Q1 2024 results in May. Earnings were very strong as revenue increased 34% to $461 million and the company raised its 2024 guidance. Despite this strong performance, the stock experienced a 10% price correction in contrast with the S&P 500’s 3.5% increase during the same period. Axon price action (Author) We view this decline as a normal consolidation, given the stock’s recent all-time highs leading up to the earnings report. We issued a bullish call after the Q1 quarter, where we reiterated our buy rating and raised our price target to $414. May article (Author) Our bullish outlook on Axon’s long-term growth potential remains unchanged. But what has changed since then is our valuation to reflect the impact of Draft One. In our Q1 report, we couldn’t cover the Draft One product in detail, as it was newly announced. After doing further research on Draft One, and analyzing the results by early adopter police stations, we believe it has the potential to be a game-changer in the public safety industry. We expect Draft One to become one of Axon’s most sought-after products, due to its very high economical value. The market seems to underestimate the impact of this revolutionary product, which, we believe, has the potential to transform police administration. Our business value analysis shows that Draft One has very high ROI and could increase Axon’s TAM by at least $8 billion. This is a net new TAM that is on top of the existing $77 billion market opportunity that the company is already targeting. This TAM expansion will further strengthen Axon’s market leadership in public safety space and increase its stock valuation. Draft One Value Analysis – Impressive ROI Draft One is an AI product which leverages generative AI and body camera audio recordings to automate police report writing. We see the benefits of the product in three areas: 1- Improved police officer productivity, 2- Reduced attrition rates by mitigating officer burnout (a leading factor in police attrition) 3- Decreased use-of-force escalations (with each fatal or injury-ended escalation costing tax money). According to Axon, the product saves each officer at least 5 hours of administrative work per week. Considering there are approximately 800,000 sworn officers in the US, the product is capable to generate significant economic value. The Fort Collins Police department’s Draft One pilot reveals even more impressive results: 45 sworn officers participated in the pilot (out of 235) 67% reduction in report writing time. 14,000 office hours saved annually. Our business value analysis of the Fort Collins pilot shows that, over a one-year period, a fully deployed police station with 235 sworn officers can expect the following benefits: $8.6 million worth of officer productivity gains. $800,000 reduction in police attrition costs. Draft One Cost savings (Author) Our cost-saving assumptions are based on the following: 67% reduction in report writing time, as per the Fort Collins police department (savings based on median hourly rate of $66/hr fully burdened police officer rate) 25% reduction in police turnover, with the current US police turnover rate standing at 14% (savings based on $100,000 ramp-up cost for each new police officer) On a five-year period, this yields a NPV of $29 million in savings and an impressive IRR of 626% for the Fort Collins Police department. From an economic perspective, this ROI is exceptionally high and creates a compelling justification for adopting Draft One. We anticipate very strong demand for Draft One due to its high economical value. DCF analysis (Author) Note: In our discounted cash flow analysis, we assumed an annual fee of $4,000 per officer for Draft One, as we don’t know the pricing. Our assumption is based on our estimate that police stations would be willing to pay $4,000 for a product that saves them $40,000 in costs (as shown in our DCF analysis). TAM Expansion We anticipate that Axon’s Draft One product will expand the company’s TAM by at least $8 billion. Given its strong value proposition and high ROI, we expect rapid adoption across police stations in both the US and international markets. Our market size estimate is based on a bottom-up approach. We assume a price point of $4,000 per officer per year. With approximately 800,000 sworn officers in the US, we estimate the US market size to be $3.2 billion. Additionally, we estimate the non-US market size to be $4.8 billion, based on Axon’s international market modeling (see below). This brings the total market size for Draft One to $8 billion, representing another substantial growth opportunity for Axon. Axon TAM (Axon) Valuation Update With Axon’s TAM expanded another $8 billion, we expect the revenue to sustain its strong momentum for the next three years. The company is guiding $1.95 billion revenue for FY 2024. However, we believe management is being conservative, as we estimate it will deliver around $2.05 billion for the full year (31% growth). Historically, Axon has consistently beaten guidance by 3% to 5%. Our revenue growth projections are 30% for FY 2026 and 29% for FY 2027 due to continuous TAM expansion. Valuation (Author) We are assigning a forward sales multiple of 12 with the assumption that the company will maintain a 30% CAGR. Applying a discount rate of 7.5%, our price target is $441. This indicates a ~50% upside potential from the current price levels (see below). Risks – Public concerns on AI ethics and bias Axon Draft One is currently the first AI reporting product for police officers in the market. Since the product handles sensitive police data, the company might be questioned on AI ethical concerns or face regulatory scrutiny. This could impact the product’s reputation and delay adoption. Conclusion The US is facing a police officer shortage and high attrition, mainly due to officer burnout. We believe Draft One is a revolutionary product that will reduce burnout, help bridge the police officer gap and reduce attrition rates. The market seems to underestimate the impact of the product, which, we believe, has the potential to transform police report-writing. We estimate that Draft One expands Axon’s TAM by at least $8 billion, positioning the company for further revenue growth. Our valuation analysis suggests a price target of $441, indicating a ~50% upside potential from current price levels.
Related Articles
