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A couple of times in recent years I have had to cut back on my participation in Axon Company (NASDAQ: AXON) to prevent it from absolutely dominating my stocks and Shares ISA.
A quick look at the stock price chart shows why. It is now up 757% in five years, at an average CAGR of around 54%!
It's certainly been a good problem to have. I have been able to implement some of the gains made into other stocks that have also performed well, including Rolls-Royce and Semiconductor manufacturing in Taiwan (TSMC).
It is true that there have been some bad choices, such as additions to Modern and Diageo. However, a single big winner over time will often more than compensate for many losers.
Weeds become less important as flowers bloom. Over time, just a few winners can work wonders.
Warren Buffett
Dilemma
My new “problem” is that Axon's stock price has basically gone up vertically over the past few months.
Once again, it's overpowering my ISA, leaving me with a bit of a dilemma. That is to say: do I sell more shares or leave the position alone?
The growth stock is valued at an eye-watering valuation, but that was also the case the last time I reduced my stake. Since then, it has more than doubled, meaning I've missed out on even more returns.
Of course, I wouldn't be thinking like that if the stock had fallen 50% recently. I would pat myself on the back, proud of my discipline and skills in portfolio risk management.
Law Enforcement Giant
Axon is the company behind the famous yellow Tasers, as well as the body cameras used by many police officers. However, this hardware typically comes bundled with software (recurring revenue), providing access to your cloud-based evidence management system (Axon Evidence).
It has a near-monopoly position in its industry, achieved through relentless innovation. This was evident in the third quarter as it highlighted growth opportunities in virtual reality training, robotics and the use of drones as 24/7 first responders in the event of incidents.
Revenue increased 32% year over year to $544 million, and operating cash flow increased 45% to $91 million. The full-year forecast increased slightly to $2.07 billion (32% growth).
However, what was really interesting was the comment about artificial intelligence (ai). Police officers spend up to 40% of their time writing reports (not what most sign up for).
Therefore, I hope their new Draft One product is a big hit with customers. It is an ai-powered tool that automates police report writing, using body camera audio to generate draft reports in seconds, saving officers a significant amount of time.
Axon will enable customers to subscribe to a growing set of ai capabilities and features. Basically, what you are offering here is ai as a service, and it could be another great long-term revenue generator.
I'm letting it run
One risk is that Axon aims for further growth with federal agencies. However, this is a very competitive landscape as you face established defense contractors and technology companies competing for federal contracts.
Additionally, I expect volatility in the stock price if there is a sell-off in the market.
Looking ahead, however, I believe law enforcement will be well funded under Donald Trump, which will benefit Axon.
On balance, I'm going to leave the holding company alone for now. I think it is poised for more gains in the long run.
