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3Q26 Update.
Axon announced 3Q26 results and the stock plummeted -18% as they cut full year guidance on softer 3Q revenue growth and the delay of 3 federal contracts. At $315 the stock is now down 45% YTD and from their all time high of $842.
Total revenue growth for the quarter was +28% y/y breaking their 10 consecutive quarters of 30%+ revenue growth. The weak spot was their Connected Devices revenue growth which fell to +16% y/y from +35% y/y last Q. Software and Services partially made up for this deceleration with growth of +43% y/y, +700bps sequentially.
They note that a large federal Dedrone deployments were delayed, which represented $30m of revenue in 3Q (and another 2 that are worth $100m in 4Q were delayed) and would have put them at 32% revenue growth for the quarter. However, the need of these larger contracts to meet their revenue targets is a new phenomenon. Dedrone aside, the softer growth was largely driven by weaker TASER revenues, which contracted q/q to $261m from $233m in 2Q26. However, it’s also worth noting that it was a tough comp with their largest TASER order ever in 3Q25 (revenues of $238m for that quarter).
On the call Rick Smith noted that they are a little past mid-cycle on the TASER 10, but they have two new TASER products that can help buttress sales: 1) TASER ION, which is a smaller and more concealable TASER, and 2) Apollo DART, which is capable of penetrating heavy clothing. Apollo DART development has taken longer than expected, but it makes the TASER devices much more attractive and more of a direct competitor to a lethal weapon as one of the main shortcomings of the existing TASER is its inability to penetrate thick clothing.
Nevertheless, CFO Brittany Bagley noted that “there continues to be good growth in TASER 10. I think you are certainly seeing a double-digit grower. I don’t know where in the double digits, but you’re seeing a double-digit grower going forward. Ion helps with that.” Still though it looks like this segment will be a slower grower at least until TASER 11 rolls out, which is still a couple years away.
Axon’s Body 5 (the next gen body cam) will roll out in Spring 2027, which means both that next quarter Body 4 sales could be pressured, but also that a new upgrade cycle is coming. The Body 5 has AI that can run on the camera and the ability to take still shots to scan paperwork and driver licenses so an officer can remain handsfree more of the time. Personal Sensor Revenue was up +6% y/y. The product segment supporting connected devices was Platform Solutions, +106% y/y. This sub-segment includes in-car video, fixed cameras, interview room cameras, drones, counter-drones, and VR training, however the growth was primarily driven by Dedrone.
Moving onto their other segment, Software and Services, we saw a notable acceleration of growth to +43%, up from +36% last quarter. This was driven by newer software including Fusus (their real-time operations), Axon Records, Axon AI, and Axon 911. They noted that 911 has doubled since last year and AI passed $100m in ARR with bookings up 50% YTD.
Taken together this all shows that while Axon has many growth drivers, they are increasingly lumpy growers due to different upgrade cycles, product launches, and now the timing of larger federal contracts (which seem to be particularly hard to estimate when they will close).
Their other two long term growth drivers beyond new products and cross selling (net revenue retention was 126%) are 1) International and 2) Enterprise. Ex-US revenues were up +17% y/y, a deceleration from +24% y/y last Q, but they noted that bookings were up 30% YTD on top of a record last year. They also expect an acceleration here in 4Q.
Enterprise is still in early innings, but they note they went from their first signed major enterprise customer 2 years ago for just Fusus video streams (where they integrate 3rd party hardware to provide a unified view and can allow police access) to now adding body cams and AI solutions.
The other big news this quarter was their $1.2b investment in Skydio, which will take their ownership stake to 37%. As part of this deal they will become the exclusive public safety distributor for the US and Canada. Skydio is the largest US-based drone maker and is focused on autonomous drones/ robots for security. They have become much more popular since the FCC put Chinese drone leader DJI on a Covered List, which blocked approvals for new shipments of their equipment. Part of this investment is to help Skydio build out their manufacturing capabilities and supply chain without geopolitically risky parts suppliers.
Skydio’s marketing materials boast a relationship with over 1,500 public safety agencies, making them a natural partner for Axon. Their drones can integrate with Axon’s Real Time Crime Center to dispatch drones to emergencies.
Axon clearly has many growth drivers and drones is just the latest one. As they sit as integral partners to many local and federal public safety agencies, they are incredibly well suited to be a provider of new critical technologies from AI to drones.
Our biggest contention with them has been 1) stock based comp and 2) poor cash flow conversion. In the last quarter SBC was $156m, which represents 17% of revenues. However, a large portion of this SBC is from a long-term employee and founder incentive plan, which still requires them hitting ambitious financial and stock price targets. They have committed to capping future dilution to no more than 2.5% annually, which is still high, but lower than the 3-4% annually they have been running at recently.
Below we see that they need to hit a stock price of $483 for the next tranche to vest. The highest tranche requires a stock price of $943 and revenues of $7bn or Adj. EBITDA of $1.7bn.
Cash flow conversion has been poor for a few reasons. A lot of revenue is front loaded at contract booking with associated costs from devices and hardware. They make more money on the back end of a contract and so as they grow, this leads to a negative working capital dynamic. This quarter alone they noted an increase in inventory of $100m. Their stated cash conversion targets are 60% of Adj. EBITDA to FCF, which they will miss this year (as expected). LTM cash flow was just $80mn, despite reporting $885mn in Adjusted EBITDA for a 9% cash flow conversion. These figures also add back SBC into cash flow, backing out which would mean LTM FCF was -$563m. However, it is unfair to back out all of that SBC as a lot of it is still contingent on the above goals being met. Nevertheless, they would still be cash flow negative backing out a more modest amount of SBC. Improving this is a key target they are focused on, but still remains a sore spot for Axon.
To the positive though, their incentives do align them quite well with shareholders (although a non-adjusted metric would be preferred).
Now we will turn to valuation and talk about their growth ambitions.
Valuation.
Below we see that at a $315 stock price their EV is now around $28bn. They currently trade at an 8x LTM sales multiple or 43x LTM mature margins of 25%. These multiples require significant growth in order for an investor to make a return.
For full year 2026 they have guided revenues to ~$3.6bn with ~$930mn in adjusted EBITDA (a metric we are not a fan of as it adds back SBC, interest expense and depreciation). They reiterated their 2028 targets of $6bn in revenue and 28% adj. EBITDA margins (about a 3 point expansion from here). This implies next 2 years revenues will need to grow at a 29% CAGR. While growth is becoming lumpier with the impact of large contracts, Rick Smith remained confident on the trajectory of growth in the 30% range.
They note their several growth drivers below.
Cross-selling existing customers continues to be a main source of growth (126% revenue retention) and that cycle is still in early innings as public safety agencies add more premium features. The AI features in specific are helpful as they cut down on the need to use human hours to produce police reports, which directly frees up a department to either have more police in the field or cut down on the police force (which usually isn’t a department’s desire, but weak applicant interest has had that effect, increasing the need for time saving technology).
While historically Axon has had very ambitious TAM figures, which constantly change, we still take it for granted that their opportunity set is still very large.
Ultimately though, as our DCF shows, they likely need more than 2 years of strong growth to rationalize an investment.
We re-ran our Reverse DCF for a $315 stock price below, varying our revenue growth and margin assumptions.
The margin range we use is 20% to 30%, which is a GAAP EBIT figure. Mature margins can be many years off and their high cost structure has us more inclined to lean toward the lower end of this range than the higher end.
For the first time since we ran this DCF, an investor can get around a market return assuming ~20% growth. An outsized return would require even higher growth though. However, Rick Smith seems more optimistic that they will be able to keep up the 30% growth for at least 2 years at which point if it starts to fade, these growth figures could still look conservative.
Picking the 20% growth scenario, that would require revenues to reach just below $9b in 5 years. While this is 2.5x their current revenue, they were able to achieve this in the last 3.75 years (15 quarters). It will be harder for them to do it again on this larger base, but if they can achieve their 2028 $6bn target, they would only need to grow 15% for the next 3 years thereafter to hit that $9bn figure.
As always, it is up to an investor to decide if they think the returns are worth the risk inherent in any investment.
*At the time of this writing, one or more contributors to this report may have a position in stocks mentioned. Furthermore, accounts one or more contributors advise on may also have positions in stocks mentioned. This may change without notice.