Chit Chat Stocks - Axon Enterprise (AXON) | Not So Deep Dive

Episode Date: February 1, 2022

Axon is an American-based company that develops technology and weapons for military, law enforcement, and civilians. The company sells hardware, but also offers software systems used to manage video footage and other digital evidence. Listen closely as Brad, Brett, and Ryan go through the history, financials, and future prospects of Axon. Enjoy the show! Our Tuesday Not So Deep Dives are sponsored by Potential Multibaggers. Multis are looking for stocks that have the potential to go up 10x in 10 years. Check-out the service here: https://seekingalpha.com/checkout?service_id=mp_1308 Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to 7investing with the code "CCM" and get $10 off: https://7investing.com/subscribe/aff/4/ Interested in more of Brad’s work? Find his Substack: https://stockmarketnerd.substack.com/ Contact us: [e-mail] Timestamps Company Background | (3:40) Industry | (9:23) Management & Ownership | (11:49) Valuation | (14:51) Earnings | (16:00) Balance Sheet | (18:12) Our Analysis | (19:40) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not-So-Deep-Dive episode on Chit Chat Money. This is the show where we cover an individual stock for about 45 minutes, get the basics of

a company, what they're doing, future growth opportunities. If you're a listener, you know how it goes. We're going to get into this real quick. Today, we're doing Axon Enterprise. This is my choice from last week or two weeks ago. And this is a company I know well, I've been following them for about three years now, not a shareholder anymore, but I have to ask Brad, have you heard about this company before? Yeah. So shout out to one of my Twitter friends, Trousy Investor. He told me that I need to check out this company and then you picked it like a week later. So it just worked out perfectly in terms of timing. But there's a lot of, I mean, I come from Mount Lee Full Lake, you guys do. And there's a lot of people in that company, really bright people who

have said a lot of good things about this firm. So I'm excited to dig in. That's true. It has been a long-term, very popular stock over at The Fool, which is a good sign. And we're going to talk about Axon Enterprise. But first, we have to talk about our sponsor for our Tuesday episode, and that is Potential Multibaggers. The aim of the Potential Multibaggers service is to find stocks that can go up 10x over the next 10 years or compound at 26% per year. Now, Chris, the guy that runs Potential Multibaggers has been on the show before, but it's not just a one-man team anymore. They have multiple people joining the service. If you go and sign up or check out his Twitter feed, you'll know the same

people that they've added recently. I forget their exact names, but with more and more people joining the team, you have basically more analysts, more comprehensive coverage. You're going to get more in-depth reports on all this stuff. And that's the perfect thing because if you have an interest in these high growth companies, the companies that are maybe riskier and have a higher chance of success, then, or excuse me, a higher chance, you know, higher risk reward opportunity, but they may be a bit riskier. You know, you want that updated and verified stuff because some of the stuff, you know, that you invest in, it may go down 50%, something like that. You know, there's going to be big drawdowns and stuff like that. As I think we're, as I think a lot of us

are experiencing right now. True. And that's why he does the buy and verify. So, you know, every week or every month or something like that, you're going to get an update on these companies to make sure, you know, you know, what's going on. If you're getting nervous or stuff like that, he's always there to communicate. So this is your alley. I would sign up for potential multi-beggars by going to seeking alpha and look for from growth to value, Google it, or go to at from value on Twitter. Brad, did you have something to add before we, uh, yeah, head into the show just really quickly. I mean, like, like Ryan alluded to growth stock investors, like from value and like myself have had a pretty, pretty wild few months, but, but

one of the main reasons I respect him so much is his content and his messaging is 100% candid and always timely, regardless of how difficult things are currently going. And I mean, going back to Twitter, we see a lot of people just kind of disappear when things get tough and he is far from that tendency. That is true. He's very consistent. All right, Ryan, do you want to talk about Axon Enterprise? Yeah. And so I'm going to steal this line right from their 10K. It says, Axon's mission is to protect life. We fulfill this mission through developing hardware and software products that advance our long-term strategic goals of A, obsoleting the bullet, B, reducing social conflict, and C, enabling a fair and effective justice system, and then D, last one, building for racial equity, diversity, and inclusion. So the way they do this is they basically sell hardware and software primarily right now to law enforcement agencies, and they have three different product categories. So the first one is tasers.

This was their first. This was their original product, and they have various versions of it. I think they update their taser probably not annually, but I guess whenever they come up with a newer version. Yeah, I'll jump in here. about three times a decade so it's not an annual thing um it takes a few years to get that life cycle going and their most recent one is a cloud connected pacer and so we'll talk about why some people are like what everything's probably cloud connected whatever there we'll talk about why that's important a little bit but they pair it by selling the cartridges as well so a bit of

a razor razor blades uh i guess product type there and then the second product category is sensors so this includes body cameras uh one of which includes their axon flex sunglasses i thought that was kind of cool. It's like a camera, cloud connected camera on your sunglasses. If you're like an officer, so if you're like approaching a car, it can all kind of be saved or live streamed. And then the other ones include in-car cameras. There's also Axon Air, which is a data capturing drone service or device. And then the last product category is not really hardware, it's software. And this is a complete suite of SaaS solutions. So these actually pair well with the sensors and the tasers. So they're kind of connected and they group these into three

different segments. So there's digital evidence management. Basically, these software solutions make it easy to store, manage, redact, and share evidence on one platform. You can actually look up evidence.com if you want. That's what it's called. You can't get in because you have to be a part of an agency. But if you are a part of an agency that signs up or subscribes to evidence.com, then you can get in there. And then there's Axon Performance and Redaction Assistant, which I'll talk a little bit about the Redaction Assistant in a little bit. And then the second sort of sub-suite of SaaS solutions is their productivity suite. This includes Axon Records, a records management system, Axon Standards, which is a use of force

reporting module, and then Autotranscribe, which basically has artificial intelligence, even though I hate saying that, that helps quickly and accurately transcribe video or edit videos. And then the third sort of sub-suite, this is the last one I'll talk about, is real-time operations. So these are decision-making and communication tools for real-time situational awareness. And right now it consists of two products. There's Respond for Devices, which alerts agencies with GPS locations and live stream video of what their officers are doing. So they can basically get real-time info, streaming footage of any sort of encounters. So think about how helpful this would be from the agency side. And then there's also basically respond for dispatch, which is the dispatch system, which alerts all the potential parties that would be involved in incident response.

So like the fire department, I'm blanking on other incident response teams, but it basically sets them all out. So you essentially have hardware and software that are meant to help law enforcement agencies reduce harm, de-escalate situations, and it also increases transparency. So, I mean, we've seen a lot of the, I think 2020 was a good example of some of the, I guess, turmoil that kind of went on with a lot of police situations. And so this is really used to kind of make it equitable, fair for both parties. And then the last thing I'll say is they have customer relationships with 95% of all law enforcement agencies in the US. I think that's municipal, right? Or? It's a US law enforcement agencies. Okay. I don't know. That's basically what it said. It's all set on the 10K. That doesn't mean

they all subscribe to everything, but they usually start with the taser sale. So they'll give them sort of a package of tasers, cartridges, and then they'll maybe bundle it with some software. Their net revenue retention rate is 119%, so they cross-sell a lot of these things to their existing customers. And then history, Axon was founded in 1993 in Arizona by two brothers, Rick and Tom Smith, apparently after two of their friends were killed due to gun violence. The goal at the start was basically just to bring tasers into mainstream usage for law enforcement. The taser was not actually invented by them. It was invented by Jack Hover in the mid-1970s, but it was really brought to market by Axon. And Axon actually used to be known as Taser International.

I think it was a good name change, although Taser International does sound kind of fun. Either way, in the late 90s, they added cameras to the bottom of their tasers to capture video, but quickly realized that the capturing video wasn't the big problem. It was the managing video on the back end that was really tough. And so this led Axon to create Evidence.com or Axon Evidence in 2009. Since then, they've added a bunch of different sensor devices, software solutions, and they all come together to make up the Axon network. I guess other important things, they IPO'd in 2001, so they've been around for more than 20 years. And Rick Smith is still in charge, but I'll let Brad talk about that.

Yep, and I'll hit industry quick before that. We're going to use Axon's own TAM estimates here, so this should be taken with a grain of salt. They're a very TAM-happy company. I think every time in the last quarter of the report, they're like, oh, we've expanded our own TAM from $27 billion to $52 billion, guys. And I was thinking like, you just, I love guys, you just made that up on your own. You could have said it, you could have said any number, but either way, you might be worried about the low market opportunity here, the small market opportunity for products like

these, because you think, oh, they're only selling to law enforcement agencies, only their customers are police departments, but it is a little bit bigger than people might think. They estimate their total 10 to be $52 billion, and they sell to law enforcement agencies, federal agencies, and consumers. This is in the US and internationally, but mainly in the US. Right now, 80% of their revenue is from the US, and the majority of their customers are these local law enforcement agencies right now. Their largest product markets are consumer safety, which they estimate to be $17.8 billion, but they have really, really low penetration to that.

digital evidence management at $13.4 billion, devices at $6.5 billion, which is devices are basically hardware X Taser, and then Taser on its own at about $4.7 billion. And this highlights, as digital evidence management is one of the largest ones, why software is kind of their long-term growth driver and why they're so excited about it for this business. And the only categories within these that they have double-digit penetration are Taser and body cameras. And this is only in English-speaking markets. So anyone that's kind of worried about, oh, who are they going to sell to all that stuff? Yeah, they got to execute internationally. But there is a long runway to grow if they can convince all these different federal and local law enforcement agencies to take up their software and hardware tools. And according to, and this is a little bit anecdotal, according to an executive at Axon, they said a congressman called them and said they wanted body cameras on every cop in America.

So there's definitely a tailwind where that people want law enforcement to have these type of tools with them to reduce gun violence out there. It also eliminates the, having their softwares, having cloud connected cameras to them eliminates the he said, she said kind of component of any sort of disputes. Hopefully, or gets it better, like more, more fair and stuff like that. But Brad, do you want to talk about management and ownership? For sure. So the Smith brothers founded the company. And so one of the co-founders, Rick Smith is currently the CEO since 1993.

He essentially graduated from Harvard and then started Axon or Taser at the time. Glassdoor rating is really solid at 87%, pretty small sample size, but so take it with a grain of salt as always. He's a former Ernst & Young Entrepreneur of the Year, and he has a few other accolades to his name that aren't extremely important, but he seems like a really bright, no-nonsense, capable human being. I mean, just based on his track record of success at Axon, you can say that alone, but listening to his interviews, he does seem like my kind of CEO, but I think I feel that way about

most CEOs. Anyway, president is Luke Larson since 2008. It sounds like his day-to-day is really COO, operations related. He was a decorated Marine Corps infantry officer. He climbed the ladder from project manager to EVP to CMO to president with Axon all over 14 years with the company. And that's a pretty consistent theme as you'll see a little later. The CFO is Jawad Asan. So he's only been with the company since 2017. He's the newbie and he's still been there for five years, but former CFO of a SaaS company that sold the Vista Equity successful at exit. And then the former CFO of GE Healthcare's electronic health record and enterprise software businesses. So So pretty good experience there.

And then chief revenue officer, Josh Isner, another one of those ladder climbers with the company for 14 years from associate to VP to EVP to now chief revenue officer, and then another Harvard grad. So always good to have management coming from Harvard, I guess. But ownership doesn't really look the way I expected it to look, at least not direct ownership, considering these founders are still in place. But Rick Smith owns about 1.5% of the company outstanding. And then he does have another 9% ish in CEO option awards, with the rest of the executives owning about 0.8% outright with

each of them having about 1% each in awards to vest. BlackRock owns 9.4% of the company. Bally Gifford owns 6.7% of the company. And you guessed it, Vanguard owns 8.7% of the company. And then 80% of the overall float is owned by institutions. It's just been a consistent theme of more and more institutional ownership over the last several years. So, yeah. Yeah. It's interesting that Smith only owns 1.5% since he's been the founder and been there forever. I wonder what happened, why they had to dilute everything, kind of what happened in that scenario. Co-founder. Co-founder, I guess. I don't know what happened, but luckily for him,

they have decided to reward him with a bunch of stock options, which we'll get to later and kind of the thoughts. I'm interested to see everyone's thoughts on kind of their employee and executive stock option plans and how they do it. But let's move into valuation quick. Market cap of $8.77 billion, ticker is AXON, pretty simple one. It's just their name. EV is actually quite a bit lower there. They have a very conservative balance sheet or not a very conservative balance sheet, but pretty conservative balance sheet. And they don't run a lot of debt. So they have about $8.17 billion for their enterprise value, EBITDA sales 9.4, EBITDA gross profit of 14.9, EBITDA operating cashflow of 56. Their long-term adjusted EBITDA margin goal is 30%. However, a lot of that has

been stock-based compensation. So a lot of that add back is going to be the stock comp and they have heavy dilution coming down the table that is expected to continue because of their stated plans to give out stock to a lot of employees. They have about 7.5 million dilutive securities outstanding versus 68 million shares outstanding. And looking at that and their granting pace and the SBC they're giving out, I think investors should expect about 3% to 4% dilution a year. That is not devastating, but it's pretty high. And it's kind of a factor you should have in here because that's going to counteract your revenue per share growth, free cashflow per share growth, all that good stuff. Ryan, do you want to hit earnings?

Yeah. The third quarter looked really good for them. They did $488 million in bookings in Q3. That's up 54% year over year. That's the best bookings quarter they've ever had. And they said they expect to have yet another good bookings quarter in Q4. The other thing I'll mention is that I believe they get, I think it was 70% to 80% of their revenue comes from the 1,200 largest law enforcement agencies. So there can be some lumpiness occasionally with bookings if they get a few of the big ones at the same time. But generally, it tends to smooth out. And average annual recurring revenue, which is their software figure, which is the number I like to, I guess, pay attention to the most, grew 42% to $289 million. And then their blended gross

margin is about 62.3%. The highest margin product they have is Axon Cloud. That's at about 75% gross margins. That actually saw strong growth. And then the Taser gross margins for me were surprisingly high. I think a lot of that must be due to the cartridges. Pricing power, they basically have a monopoly, so. I guess that then as well. But 66% gross margins on that Taser product. Their adjusted EBITDA margin for the last nine months has been 23%, but their operating margins are negative 22%. So that talks a lot or that should show- That's the SBC. The SBC kind of discrepancy. And I'm going to talk more about that in my low lights,

just, I guess, a little heads up, but their free cashflow, they report about 75 million for the first nine months, I think it's around a hundred million for the last 12. So it lags adjusted EBITDA. It's about half of adjusted EBITDA. And keep in mind that you're also, you don't want to look just purely at free cashflow. You want to do free cashflow per share because there are going to be those dilutive securities. Yeah. And they do have a lot of capital investments right now. So obviously their margins could scale, but they're really in growth mode. So it's kind of hard to tell, hard to value him on that right now. Brad, do you want to have balance sheet wrap up the first half for us? Yeah, sure. So aside from those executive awards and share awards that are going

to dilute by about what, 10, 10, 20%, somewhere in there, I can't do that math that quickly. But aside from that, the balance sheet is pretty wonderfully clean. So it's got, as Brad kind of alluded to, 580 million in cash and equivalents. So 280 million there, and then another 300 million in marketable securities and other short-term investments. So highly liquid assets at 580 million overall. It's got $150 million capacity to borrow under credit revolvers. It's almost entirely untapped. They've drawn down 6.1 million at a really modest rate of LIBOR plus one or one and a half, depending on liquidity ratios. And as of right now, LIBOR plus one. So essentially no debt with a hefty cash position and profitable or uh profitable uh if you allow them to

generating cash yeah they're generating cash yeah the problem isn't profitability for them or cash generation it's the dilution because they basically use a lot of non-cash stuff uh that are still generation for shareholders yeah and they actually have a stake in a public company it's called celebrate it's a data analytics thing for law enforcement something like that haven't looked into it but yeah they own a stake in that as well pretty small portion on their balance sheet, it's included in that marketable securities. But most of that is just cash and equivalents. All right, let's hit the ad break. This episode is brought to you by La Quinta by Wyndham. Here you are miles from home and ready

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be enabled in the panoramic wi-fi app restrictions apply okay welcome back next up we have anecdotal evidence brad anything for us here thankfully i have no anecdotal evidence to report that has never been tased huh that is good that is good yeah well brett kind of has an interesting one uh that you can some shareholders may like some shareholders may not like i'm a little anti it uh yeah ryan you have nothing right i'll just go yeah so i'll say serious one here is that uh any cops i've talked to personally say that departments it's the top company for that industry or for local law enforcement and that departments are spending a ton of money with them which is pretty clear. I don't think you have to really, you know, you look at the financials, it's pretty

clear they're doing that. But I did happen to meet someone that knew a higher up there at Axon. I believe it's something like, I don't know, one of their, it was a chief something. So I don't know, it was an engineer, maybe something like that. And this person that worked for Axon had a private jet, which is interesting. So what you said, a lot of the executives are getting, someone said a lot of the executives have jets that's true yeah yeah something like that well this one specifically had one um it would just to me it indicates that's a little bit angelo evans that stock-based compensation has made uh these executives quite wealthy um take with that what you will it is you know making them wealthy and along with shareholders other shareholders

right now but again that's you know what happens when you give out 30 of your revenue as stock-based compensation. That's a lot. Your employees can get pretty wealthy pretty fast. All right. Future growth opportunities. Brad, what do you got? Yeah. So it seems from what we've covered that they've essentially focused on enterprises or not enterprises, but the public market and police departments and things like that. So this is sort of joking, but also sort of not. But maybe start marketing more heavily to single women or just consumers in general as sort of a replacement for people keeping maybe a handgun in their house or something like that in certain states. This seems like a nice upgrade to that in terms of safety and responsibility. And yeah, so maybe

become more consumer-facing in the taser industry. That's true. They did mention that they've lagged on consumer and they're trying to ramp that up over the next few years and market it better, maybe a different like taser that's more of a consumer product because the taser seven the new one they got is really amped up not like powerful wise but like with all the stuff you would need as a police officer connected to the cloud and all that stuff but we'll see maybe they release something yeah i'm not overly fond of the idea of every consumer being strapped with a taser but the not the one that not the one that they sell to police officers well i have a feeling that it isn't the majority of the taser purchasers might not be single women that's true that's true

And I will say, though, and this is kind of on, I guess, it doesn't look like either one of us have this as our future growth opportunity, but potentially international expansion as well. I think I imagine the consumer economics aren't quite as good as agency economics because they bundle them and they can buy them together. And then, you know, you could potentially cross sell the software. So I really like I think that should kind of be their focus is the bigger groups. And so that kind of is my future growth opportunity is cross selling their software products. Uh, and that's, I guess, a general future growth opportunity, but to highlight one specifically Axon recently updated their video redaction tools. The way I understand it, when a video gets shared to evidence.com or automatically uploaded

to Axon cloud, there are people, or there's data in those videos that are it's in it's enforcement agency's responsibility to keep that stuff private. And so law enforcement has to go in there and edit those things out, like bystanders' faces, stuff like that. And that process is known as manual redaction. So with Axon's redaction assistant, which they highlight in their 10K, agencies can quickly redact their videos using AI. So it kind of automatically picks out like bystanders faces who aren't supposed to be a part of that video or license plate numbers that are supposed to whatever they're any private data. And so it just takes a lot of time. It saves a lot of time for law enforcement agencies. So that's one example. But cross selling stuff like that.

Yeah. And I'm kind of in the same boat. I got to go with Axon Cloud and Evidence.com. excuse me, it's the software backbone that's really helping them do this cross-selling and the bundling that has... And in general, this has really small market penetration. So you can see why they believe that their net revenue retention rate can stay high because a lot of agencies or police departments already have taser contracts. But if they can come back in a few years and say, look, do you want to add on this software stuff? It connects

everything together. Then you can get each police department to say, oh yeah, we'd rather have you than these old tools. And if they're very useful, reducing the busy work, all that good stuff, it can be extremely helpful for these police departments. Plus, they expect this segment to have 80% gross margins over time. So with those high margins, long runway to grow, I mean, I think you can kind of expect this segment to grow at a double-digit rate for the next decade. I think that's pretty likely. That's a big future growth opportunity for me. And it's probably my favorite part of the business. All right. Highlights and lowlights. Brad, what do you think about this business overall? Yeah. So maybe setting aside salaries for a second. The management

tenures are awesome. So I really like when there's a consistent theme of executives climbing all the way up the ladder to get into that role. And that is a consistent theme here. The founder's been with the companies for two decades, more than that. And maybe that's because he gets private jets, but that's another point. That's why that Glassdoor rating is so good, right? Every employee can get a private jet down in Scottsdale. Exactly. And then low light, I'll try not to steal your low lights. So maybe I'm reaching a little bit here and this is sort of unfair to the company, but investing in a company that centers around tasing might not garner as much investor excitement. And a warm welcome is

uh, maybe a company selling something that isn't a taser. Uh, so just thinking about that, um, in terms of not, not in terms of the fundamental case, but maybe the multiple being capped, um, in the future. Uh, and, and again, reaching there because there's a lot to like about the company aside from what I'm sure you guys are about to talk about. Yeah. There's political and cultural stuff that could make them, you know, give them headwinds, uh, for sure. There's a lot of unknowns there on what say politicians or people that give, you know, budgets to police departments, you know, that's definitely a risk. Yeah. I mean, that was, I think that actually affected the stock at one point in 2020, because there was a lot of talk about reducing police

department budgets. Stock was down during that big bull run during summer 2020. Yeah. And if there's constraints there, it obviously can affect Axon as well, but it seems like that has sort of subsided and considering Axon's growth over the last year, that really hasn't stopped them at all. And if there ever was a time that I think they would have stalled growth, it would have been during that period. But my highlights, they have a massive installed base. Pretty much every law enforcement agency in the US is a customer in one way or another. And so that provides just easy customers to cross-sell the software to. So if you come up with a new software solution that's really helpful for them in some way, it's pretty easy to sell

because you have such good relationships with them. The other thing, they have strong annual recurring revenue growth. With that software, the net revenue retention rate has stayed high sustainably for a while. It's been at like 119% or higher, I think. Six straight quarters. Six quarters in a row. Yeah. So yeah, really strong there.

My lowlights though, and I think this is going to be the same one as Brett, is the compensation structure. So I went through the proxy and it is one of those sort of difficult to understand proxies because there's so many different tranches that they can kind of get paid for, but it's primarily based on adjusted EBITDA and market cap targets. And they've generated $212 million in adjusted EBITDA over the last 12 months, but they paid out $315 million in stock-based compensation. And the other thing is they adjust out the stock-based compensation in their adjusted EBITDA metrics.

So they get paid. Yeah, it's just like Tesla's. It's kind of horrendous. You're hitting these metrics. You're extracting out your own payment, which is one of the biggest expenses for you, and then getting paid more. And if it's a market cap hurdle, that's way worse. I hate market cap hurdles because that incentivizes you to dilute your shareholder base. It's just not great because you line that up with this, you're going to give out a ton of stock,

delete your share count by 3% to 4% per year. And then you award yourself because the market cap's bigger. Well, the market cap might just be bigger because you're diluting it more. I'd much rather have whatever these type of rewards on share price, which I think is a lot more alliance incentives i don't like them generally but yeah or i don't know like a free cash flow target or i mean they have revenues part of it but i don't like seeing adjusted ebita as one of their performance metrics for stock if it was cash maybe i don't know yeah but if you're extracting out your stock-based comp in your incentives yeah what do you think of the name guys so the the plan for the employees x financial x is capitalized

ex is financial oh yeah they're uh it's excited it's the exponential stock plan um but you can see it's a bit of a red flag to be honest when they call it that why so stock-based compensation i think tripled over the last 12 months the executives have a lot of jets and the stocks up like that's that's i don't know exactly i heard that i heard that from someone in scottsdale yeah i just i think they need a new compensation structure um no they should one of my lowlights they're not going to though uh they have their own islands too i don't know yeah they all got their own islands yeah islands in scottsdale well the jets they go to a lot of places all right let's move into all right no that's mine uh highlights though for me it's pretty simple

the bull cases are not bull case, but highlights is durable grower, incredible moat, large market opportunity. Like what more do you need? Lowlights though, I can't really find anything about the share dilution and the incentive plans, but Ryan already covered that. So let's move on to bull case. Brad, what do you think, you know, they kind of need here to go right over the next few years to decade? Yeah, I'm going to, I'm going to do my bull and bear cases together because they're very related and it'll make more sense if I just do them back to back. So for bull case, And the bold case is that this is the final evolution of public safety beyond guns and deadly weapons to something that finds the right balance between debilitating but not killing people. And then it's so its products are used to create a safer society and it leans into this massive market share that it has to continue growing in a space that has a lot of or a lot more room for growth based on these markets.

But the bear case, conversely, is that this is just part of the process of evolving from deadly weapons to something that is 100% temporary debilitating, but doesn't inflict any pain. So to me, that's the ideal public safety scenario. I'm almost thinking of weapons from SpongeBob SquarePants where you shoot it and then the person just can't move for like 30 seconds or something like that, but there's no pain or anything. So again, a little bit out there. I'm not an expert on the weapons industry, but bull case is that this is the final destination

in the evolution of public safety. And bear case is that this is just a stepping stone to get somewhere even more appealing for society as a whole. That is important. Yeah, the bear, they are investing heavily into, I think R&D is 20% of revenue. They're investing heavily into their 2030 goal of obsoleting the bullet, which is, they say that as their kind of slogan, but their goal when they actually talk about it is to make the nine millimeter handgun obsolete. So basically, for police officers replacing those,

if that fails, that's going to be a lot of wasted dollars. And that's definitely a bear case. All right, Ryan, what's your bull case? The bull case for me is that they're able to keep their net revenue retention rate above 110%, and I guess ideally above 115% for the next five to 10 years. If they're able to do that, whether it's through cross selling more software solutions, or even just raising prices, I think this is going to end up making a pretty good investment, assuming that they're able to pair that with free cash flow per share growth and not dilute. Yeah, I think there's a lot of ways that they can grow here. Yeah. And for me, it's sustained double-digit revenue growth, steady margins, counteracts

that 3% to 4% dilution per year. But I do think you need to expect overall revenue growth to grow but above 15% just to counteract that because they're rewarding employees a lot. Like we expect it, or like we have said, that can be fine if growth is sustainable. Their goal is 20% growth. If that happens, I think people will be fine as long as margins stay good. But let's move on to bear case. Brad, do you highlight yours? Ryan, what do you got? Well, I guess the,

the big bear case for me is that dilution and then the executive compensation just bogs down the free cashflow growth that shareholders get. Other than that, I don't know if there really is a big bear case for Axon. I don't think, I think they have such a strong foothold within their customer base. There's just no way that that kind of, they get replaced in that sense. Yeah. We didn't talk about this, but they have five, seven, 10 year contracts. Typically the remaining performance obligation is like in between, I think it's about $2.5 billion right now and growing pretty quickly. So their two to three-year revenue horizon is very predictable. And honestly, a lot of it is locked in. It's kind of like a defense contractor

in that regard. It's really hard to see how they'd lose that revenue over time. Yeah. And the other thing is, I was trying to think of maybe a product that makes the taser obsolete. But they're trying to do that. I know we studied a business one time, a long time ago that was like a kevlar rope or something like that that wrapped around people but forget that name you still need devices that are connected to evidence.com and something that's cloud connected with other axons other services so i think they really just it's really hard to replace what they provide yeah when adding on the software stuff definitely don't want to hit that home too much but i think mine multiple compression could happen here i mean

I mean, they're not cheap. Correct. You know, so that could definitely be a bear case. And I also think maybe margins aren't as high as people think, because if they do 30% adjusted even to margins, that is not that great for how much stock they give out. So if margins aren't as great as people are- It's like 10% cashflow margins. Maybe, yeah.

It's not, yeah. If that's not as high, then it doesn't deserve this sort of sales multiple. You're going to get a big compression here, but we'll see. All right. More or less interested, Brad? What are your final thoughts for Axon Enterprise? I could kind of go either way here. I think I'll go more interested. I mean, a lot of just the financial fundamental cases are really compelling, and then we get into some maybe social issues. But I mean, this is improving social issues,

so that shouldn't be too big of a concern. But just not to beat a dead horse, but the stock-based compensation is something to keep an eye on. So maybe, I mean, I would wait to see if these become more recurring over time or actually probably go back a few years to see how recurring they've been and then make a decision based on that. But I don't know. A lot of things about this company should make me excited and I'm struggling to get excited about it, but I will go more interested. All right. Brian? I'm less interested. I really love the business. There's the compensation overhang. if this were a little bit cheaper, I'm less interested at today's price. I am more interested

in the business, but I don't like the price right now, especially on a cashflow multiple. Yeah. I'm more interested. I think the business would be, this would be a layup investment if they didn't have the SBC stuff. It's one of the few businesses out there that I think you can be confident in their revenue growth. Like very, like not even like some people say like, oh, I have 50% confidence in this company's revenue growth potential. I think this is almost locked in. It's a virtual monopoly. The contract's for a long time, high margins. I mean, you have these relationships with law enforcement agencies that don't even have to have profitability. They just get funding from the government. I mean, it's a pretty beautiful structure for them.

But I mean, just not right now because of the SBC. It's not even the SBC. It's the SBC tied bad incentives and there's plenty of good companies out there if something like this comes up i it just it just goes on the too hard pile um i wish it wasn't that that wasn't the case because they didn't have this stuff that we talked about constantly as the low lights this would be one i mean i think it would be a layup like really really easy investment to make but it is there so that's unfortunately it is all right stock for next week we had me this week so ryan Your turn. What do you got for us? I actually forgot to choose one, but what do we think of Roblox? It could be fun. It could be fun. Brad,

what do you think? I don't have any anecdotal evidence, but I mean, it's a pretty cool company. I mean, if you're 10 to 15 years old, you're probably playing Roblox today. So is that what you call it? The more I talk about this, the dumber I'm going to sound. So I'm just going to it is the it is the one that even makes people that like us in our 20s feel old uh the company out there all right that and maybe discord but all right all right that's going to do for this episode remember as always if you like the show give us a rating on spotify or itunes or apple podcast excuse me that is the one way to help the show out um easiest way to help the show out five stars obviously remember we are not financial advisors anything we say on the show is not formal

advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time.