Shareholders of Axon Enterprise (AXON -1.57%) have endured a roller coaster ride in 2021. The company, which makes stun guns and body cameras for police forces:

  • Changed its ticker symbol (from AAXN)
  • Saw shares surge more than 75% on no real news
  • Then witnessed shares fall an additional 13%, again, on no real news.

In this video from Motley Fool Live, recorded on Feb. 12, Motley Fool contributors Brian Stoffel discusses with contributor Jason Hall what he'll be looking for when Axon reports earnings on Feb. 25. While most people look at headline numbers with software-as-a-service (SaaS) stocks, Stoffel will be looking at three broader areas that will drive returns for long-term investors.

Brian Stoffel: I want to point out just a couple of things that I think are really important for investors to look for when earnings are reported on the 25th of February. Obviously, we all like looking at those headline numbers, which is the revenue growth. Axon (Nasdaq: AAXN) does a great job of breaking out the amount of revenue they get from their tasers, the amount that they get from their body cameras, and then the amount that they get from software solutions. Out of all three of those, software solutions are the ones that I focus on the most because this is a stock that I hope to own for the long run, and that's what's going to drive the long run.

I should stop for just one second because I realized we haven't said what Axon does. Axon used to be Taser International. They make stun guns for police forces but they've transitioned into body cameras. But it's much more than body cameras because they have a database where you can download the footage that body cameras record, and you can search that footage. You can literally put in words and search for something happening in the video.

Then they've got other products coming out. Which gets to my first thing that I'm going to be listening for. They've got two newer products. One is Axon Records, and Axon Records is something that can take all the audio and the visual that a body camera might record from right here and it can autofill paperwork. Usually, they hope it's with less bias, not because police are biased but because humans are biased, and the big deal here is that that reduces the amount of time that officers need to spend behind the desk, and gets them out in the community, hopefully improving relations, which is what we need more than anything else. That's Axon Records. Baltimore PD adopted it right after it came out this past year, and so I'm interested to hear any updates on Baltimore PD but also any other updates on other large police forces adopting this, because with one of these things that a police force adopts, they're never switching. All of their footage is on this platform. Once you get someone in this, they're not leaving.

Jason Hall: Right. This is a Cloud service that they're offering with AI that's powering a lot of the technology that underpins how it works and makes it functional.

Stoffel: Exactly. Then the other product that's at least worth listening to for color is Axon Respond. What this is it tries to be like a real-time solution to help a dispatcher tell different units where other people in the units are located. If you ever watch CSI and you can see a map showing you where different officers are located, it's like that. That is a newer product and we haven't gotten any announcements on major adoption of that. That's the first thing, new products, that's Axon Records and Axon Respond.

The second thing I'm listening for is their international growth. They just touched off in their most recent quarter talking about how primarily it's the United States that uses this. But because we've gone much further than just stun guns here, they're applications that people want to use abroad as well. I am going to be listening for that.

Then the last one, which was the big one last quarter, that was a surprise are other government agencies, in particular, federal agencies that are signing onto use this as well. We got word that there's a Department of Defense contract in play, we don't really know any of the specifics of that. We've even seen EMT services, firefighter services signing on to use Axon system because they are finding value in the footage that's recorded. Those are the three things that I am going to be looking for. Records and Respond, international growth and growth outside of police forces in the United States.

Again, I'm also going to really urge people to say, look, it's up 75 percent this year on almost no news. If this isn't an amazing report, there's a good chance that it's going to drop, and that's OK because you should be focused on where this company is going to be in 2030. They've laid out a strategy for how they hope policing can change between now and 2030, and spoiler alert, it actually dovetails quite nicely with the goals behind people who want to defund the police. They are actually quite symbiotic, they don't work against each other. This is one that I want to hold for the long term and so I think it's important to prepare yourself for that going into February 25th because the expectations are only that much higher given what the stock has done over the last six weeks.

Hall: I want to put a little more context on this. I've shared a screen here just to really deep dive a little more into Axon's total results and looking back over the past several years. This is a company that five years ago was doing $200 million year revenue. They're growing the revenue at a rapid rate but there is still on track to do maybe $700 million, say $100 million year revenue in 2021. So this is still very, very early in the growth of this business. The company's gross margins have held relatively steady, and I think they are probably going to go higher as the revenue increases, and they really start getting more operating leverage out of the services and that recurring revenue. Operating margins are negative right now because they are piling tons and tons of money into building out that operating infrastructure. Just as we've seen with Zoom, just as we've seen with Amazon, so many of these other companies, once you get to a critical mass, the cash flow just starts flying in, and I think that's probably going to prove to be the case with Axon. Even maybe with that $13 billion valuation, it's maybe not about entry point.

Stoffel: Well, and Jason, the other thing I want to say on that operating margin, Axon knows that once, say, Baltimore has signed on to Axon Records, they're not leaving. They did this with their body camera business three years ago. They gave it away for free for a year, and they are doing that with each of these new products. They're giving it away for free because they know they're willing to lose money in Year 1 so that they can make money in Years 2-100. It's a smart long-term move. That's something to keep in mind when you see those negative operating margins.

Hall: Yeah. Thanks for that, Brian. Thanks for being so big on that company. Hopefully, it's brought some other investors along for the ride.