A Multi-Product Case Study 4

Authored By Louis Stevens

In today's Brief, we will consider Axon's multi-product platform, which could also be called a Walled Garden Ecosystem, which is a title reserved for only the very best business models on earth, such as Apple's union of its hardware and software ecosystems, from which very few escape once immersed.

To this end, Axon is undoubtedly one of the most compelling businesses in LAS' coverage universe.

On X, I recently shared a chart illustrating the company's meteoric growth in recent years, which you may review below.

Axon Grew Almost Perfectly Linearly Over The Last Five Years

Axon's Growth Rate Today Is The Same, If Not Better, Than It Was 10-20 Years Ago When It Was Much Smaller In Scale

Notably, the vast majority of the above-illustrated revenue and gross profit growth has come within the United States, and the majority of these sales still derives from its legacy hardware businesses, the specific products of which you may review on the left side of the graph below.

A Graph Illustrating Axon's Multiple Products (Left, Y-Axis) & Axon's Penetration Within Various Regions Globally (Top, X-Axis)

Axon's management has stated that Axon's international business could be 5x larger than its domestic (U.S.) business, and this is entirely conceivable considering the company only recently began international expansion in earnest; public safety has been slower to adopt technologies such as cloud computing generally speaking, and Axon's demonstrated success expanding into new industry verticals outside of local law enforcement suggests it could grow even once it saturates its local law enforcement agency TAM globally (still a ways to go in this regard).

While Axon has a relationship in some form or fashion with the vast majority of local law enforcement agencies in the U.S., it does not have the same with international law enforcement agencies. Moreover, in the U.S., Axon's competitors have very weak offerings relative to the unified, multi-product platform that Axon offers.

If U.S. competitors cannot effectively compete with Axon, then it's likely that international competitors will struggle as well, especially in relatively underdeveloped (from a digital industrialization perspective specifically) regions such as SE Asia, Latin America, and Africa (very long term here).

The Walled Garden Ecosystem

Axon is especially compelling because it built an Apple-like Walled Garden Ecosystem in which it first launched its hardware products, e.g., Taser, Body Cam (worn on an officer), Fleet Cam (in vehicles), and, today, drones; then, it layered on a software ecosystem that connected the entire law enforcement apparatus with a centralized nervous system.

From Axon's Draft One software product, which is an AI that reviews body cam and fleet footage then provides summaries and interpretations of the events that transpired during a law enforcement incident, to Axon's records, which is a database that can be accessed by the law enforcement agency and judicial branch of a given government, Axon has built an end to end hardware and software ecosystem that resembles Apple's Walled Garden Ecosystem.

And Apple's Walled Garden Ecosystem is infamous for its inescapability.

When we think of Axon's Walled Garden Ecosystem through the lens of our four points of equity value (listed below), we can see that it creates greater durability of cash flows due to its inherent inescapability.

This makes Axon more durable and more attractive as a business due to the durability of its cash flows through the ebbs and flows of economic cycles.

1. Free cash flow per share
2. The growth thereof
3. The durability thereof (Axon's free cash flow becomes more durable as customers become further locked into its ecosystem)
4. Our next best alternative, such as the 4.5% yield on the 10 year treasury

In short, Axon operates a compelling business model in that it has built a multi-product platform, which carries with it a number of benefits on which Axon has indeed capitalized, and fashioned this multi-product platform into a virtually inescapable Walled Garden Ecosystem, and Axon has scantly begun its international expansion.

I believe management's view that the company could 5x its current sales via international expansion.

Disclosures: 

L.A. Stevens has not rated Axon.

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