Baron Funds, an asset management firm, published its “Baron Discovery Fund” first quarter 2022 investor letter – a copy of which can be downloaded here. In what turned out to be a challenging first quarter, Baron Discovery Fund (the “Fund”) decreased 16.30% (Institutional Shares), which was 3.67% below the Russell 2000 Growth Index (the “Benchmark”). Try to spend some time taking a look at the fund’s top 5 holdings to be informed about their best picks for 2022.
In its Q1 2022 investor letter, Baron Discovery Fund mentioned Axon Enterprise, Inc. (NYSE:AXON) and explained its insights for the company. Founded in 1993, Axon Enterprise, Inc. (NYSE:AXON) is a Scottsdale, Arizona-based electrical weapons manufacturing company with a $6.2 billion market capitalization. Axon Enterprise, Inc. (NYSE:AXON) delivered a -44.26% return since the beginning of the year, while its 12-month returns are down by -43.36%. The stock closed at $87.51 per share on June 14, 2022.
Here is what Baron Discovery Fund has to say about Axon Enterprise, Inc. (NYSE:AXON) in its Q1 2022 investor letter:
“Axon Enterprise, Inc. (NYSE:AXON) is a public safety-oriented company that sells its products to governments and law enforcement agencies around the world. Its mission is to “…make the bullet obsolete” using non-lethal TASER® devices combined with digital cameras, cloud-based software, and virtual reality training. This array of technology aims to provide better relationships between law enforcement and its constituent communities, and to reduce fatal outcomes dramatically when stressful confrontations occur. Axon takes its mission seriously and has an extensive ethics committee that includes members of law enforcement and activist communities. Axon claims that with usage of body cameras, complaints against police departments are down 88% and use of force is down 58%. We believe the company is a premier part of the solution to prevent bad actors in law enforcement and the mistrust that has resulted from those bad actors.
The company has three major product lines: first, high-definition cameras (sensor division) worn on the body or mounted on vehicles (newer products incorporate live streaming and automated license plate readers); second, subscription-based digital evidence software (evidence.com) that stores body camera and third-party video allowing for evidentiary chain of custody, search, and report writing (officer court time reduced by 70%); and third, non-lethal TASER devices (that can temporarily incapacitate dangerous and violent actors using an electrical shock) that save lives by avoiding discharging firearms (the company claims 258,000 lives have been saved so far). When used in combination, its cameras provide GPS officer location and live streaming, while its software can provide real-time operations mapping of active situations. In the future, Axon seeks to add consumer safety products (launching in 2022) that will automatically notify 911 if deployed, drone-based camera products, more VR training, and additional cloud-based software, including evidence software usable by prosecutors and defense attorneys, which could be a $1 billion market on its own.
From a financial perspective, the company is really built upon recurring revenue – it is not a one-time device sales company. Software made up 28.5% of 2021 revenues. And while hardware made up 43% of 2021 sales, about two-thirds of that is now bundled under long-term deals, so really only about 15% of the company’s total revenue is one time in nature. The remaining 27% of sales is warranty and cartridge consumables, which are largely recurring as well. As software grows as a proportion of revenue (to what we believe will be over 40% by 2026), margins should expand. We believe that EBITDA margins can expand from 20% in 2021 to nearly 30% by 2026. Revenue growth, which was nearly 27% in 2021, should continue at over 20%, given that the company is less than 2% penetrated into its $52 billion addressable market. Finally, the company has over $400 million of cash and no debt on its balance sheet. When combined with its significant free cash flow (about 75% of EBITDA converts to free cash flow), Axon has significant capital to grow its business, complete accretive acquisitions, and potentially return capital to shareholders.”
Photo by STNGR Industries on Unsplash
Our calculations show that Axon Enterprise, Inc. (NYSE:AXON) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Axon Enterprise, Inc. (NYSE:AXON) was in 29 hedge fund portfolios at the end of the first quarter of 2022, compared to 35 funds in the previous quarter. Axon Enterprise, Inc. (NYSE:AXON) delivered a -27.79% return in the past 3 months.
In March 2021, we also shared another hedge fund’s views on Axon Enterprise, Inc. (NYSE:AXON) in another article. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters 2022 Q1 page.
Disclosure: None. This article is originally published at Insider Monkey.
