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Conclusion:
Assuming that Axon can grow at a terminal growth rate of 5%, an FCFE discount rate of 9.69%, and free cash flows can grow at 58% per year for the next 5 years if Axon fully optimized for free cash flow generation instead of aggressive revenue growth by cutting down on capital expenditures and expanding into new markets, the market perceives Axon is fairly valued at $659.90. These expectations are admittedly high and if I were to provide an estimate of Axon’s FCF growth over the next five years given today’s financials while they aren’t optimized for shareholder returns, a range of 15-18% is reasonable, far below the 58% that the market expects.
If Axon optimized for free cash flow growth, Axon's FCF would need to grow from $320 million in 2024 to approximately $3.15 billion in 2029. Furthermore, to support FCF of $3.15 billion, revenue would likely need to exceed $6-8 billion by 2029, assuming improved profit margins. The current net Profit Margin is approximately 19.47% (based on $403 million net income on $2.07 of billion revenue). To achieve the necessary FCF growth, Axon would need to significantly increase margins to potentially 30-35% or more. This level of margin expansion is challenging and may not be realistic in the industry.
However, given the current market environment, it is clear that investors are willing to pay a premium for revenue visibility and stability through recurring revenue, which translates into stable cash flows. We can look to Costco as an example with their membership business model–on paper the valuation doesn’t make sense, but despite this, investors are willing to pay the premium. Investors are also willing to pay a premium for companies that pass the ‘Rule of 40’ and have a flywheel/network effect, which increases switching costs and creates a competitive moat. To briefly describe the Rule of 40:
It is a quick assessment for investors to evaluate whether a company is focusing appropriately on growth versus profitability and helps identify if a company is growing recklessly at the expense of profitability or being overly conservative, potentially missing growth opportunities. Furthermore, companies consistently meeting or exceeding the Rule of 40 are often seen as having sustainable business models.
Axon Enterprise achieves a Rule of 40 metric of approximately 51.47%, which exceeds the 40% threshold. This indicates that Axon is effectively balancing robust revenue growth with healthy profitability.
Although Axon would to significantly increase margins and/or revenue to achieve the free cash flow target I outlined earlier sounds unlikely, consider that in 2014, Axon’s annual revenue was only $165.16 million compared to the $2.07 billion estimated for 2024.
There are a few ways that I see Axon reaching this target:
1) by creating entirely new market segments. Axon has a storied history of entering, acquiring or creating entirely new markets, such as the introduction of cloud software evidence management, Axon’s entry into drones as first responders, utilizing and bundling Draft-One into existing pricing bundles and hiking average selling prices, upgrading and innovating existing hardware significantly (such as the Taser 10 having over double the ammunition capacity and range than the prior generation), expanding into new markets such as emergency services, correction facilities, and border patrol and protection.
2) Software as a service becoming a larger share of Axon’s total revenue mix. As of the latest quarterly data, 37.93% of their revenue comes from software. They only entered the software business in 2010, marked by the launch of Axon Evidence, a cloud-based digital evidence management platform. This move transitioned Axon from a hardware company intoa software company, which signalled a broader strategy shift to provide integrated solutions for law enforcement agencies. It further strengthened their network effect and cross-selling ability by combining hardware products like body cameras with software services for managing and analyzing digital evidence. The gross margin of the software side isn’t publicly provided. However, we can derive a reasonable estimate of 75-80% based on industry trends. By growing the software side over time as the adoption of real-time crime analytics, evidence management, and Draft-one increases, gross margins will naturally trend higher.
3) Monetization of Data and Analytics:
Axon is leveraging accumulated data to offer high-margin analytical services or predictive policing tools.
4) Strategic Acquisitions:
Axon has a propensity to enter new end markets by acquiring existing companies such as SkyHero and Dedrone. Furthermore, by acquiring major competitors, they can rapidly increase market share. Consolidation naturally leads to efficiency gains and higher margins.
5) Global Expansion and Entering Emerging Markets:
Axon is capturing significant market share in large international markets with strong demand from EUropean police forces. Given that citizens less commonly have access to firearm, officers don’t need the lethal stopping power of a firearm. Axon provides the option to use non-lethal means to protect themselves during violent encounters.
6) Overcoming barriers to entry in countries with massive demand potential
7) Government Partnerships: Securing exclusive contracts with national governments.
Given the reasons I have provided, assuming that Axon optimizes for free cash flow generation over revenue growth when they eventually reach a stable run rate, I believe that this growth rate is achievable.
There is a saying that there is no moat in software. Hardware alone eventually becomes commoditized. Only by combining both can a company build a lasting competitive edge. Axon is that company. Equipped with an interconnected suite of software and hardware sysfems, the software segment acts as a high margin counterbalance to the cyclical hardware side of the business. First-mover advantages eventually fade, but Axon has capitalized on this advantage well enough to establish a substantial lead, years ahead of the closest competitor. Axon’s ecosystem has created a monopoly with the ability to cross-sell and upsell synergistic products and services to both new and existing customers. It is my firm belief that Axon has the potential to become a household name in the years to come.


When forecasting the impact of tariffs on gross margins, keep in mind that 37.93% of Axon’s revenue as of Q3 2024 is software. A recent announcement on January 29th, 2025 was released regarding the termination of a partnership between Flock and Axon, which suggests that Fleet systems are still in a cyclical digestion period if Axon is looking to cut capital expenditures. Fleet systems are 5% of total net sales, and will represent an even lower figure next quarter, improving the aggregate gross margin profile.
I estimated a 10% increase to COGS, but keep in mind that 1) the taser supply chain has a large percentage domesticly sourced with a diverse set of components with some coming from China and Mexico, but Axon has previously handled retooling of supply chains and appropriately shifted trade flows to navigate tariffs in Trump’s first term. 2) when it rains, it rains on everyone. If everyone’s costs increase, it hurts the industry broadly. However, if Axon can raise prices to pass on to customers—most of which are less price sensitive as demand is inelastic—this can actually create an opportunity to capture additional market share.
In addition to addressing the impact of tariffs on valuation given that tariffs will likely weigh on gross margins, we can assume that Trump will also his lower the corporate tax rate from 21% to 15%. Taking this at face value, this will significantly impact the capital structure calculation when considering Axon’s weighted average cost of capital. When valuing Axon on a three-stage free cash flow to equity model, the WACC is roughly 9.69%. A lower tax rate reduces the tax deduction on interest payments, thereby increasing the after-tax cost of debt. For the impact on the cost of equity, investors will require higher returns if they perceive that companies will retain more earnings due to lower taxes, potentially leading to higher stock valuations but also higher expected returns, which could increase the cost of equity. If the company’s capital structure remains constant, a decrease in the tax rate would increase the after-tax cost of debt, which, all else being equal, would increase WACC.
However, we can assume higher earnings as a result of a lower net tax rate, potential shifts in financing strategies to take advantage of lower taxes, and for multinational companies like Axon, changes in one country’s tax rate might not have a uniform impact, especially if they can shift profits or operations to jurisdictions with different tax treatments. Furthermore, higher expected future cash flows from lower taxes would increase the present value of those cash flows in a DCF model, justifying a higher valuation multiple.

Axon has initiatives aimed at enhancing public safety in retail environments in Canada, partnering with retailers to implement safety technologies like body-worn cameras.

Axon has initiatives aimed at enhancing public safety in retail environments in Canada, partnering with retailers to implement safety technologies like body-worn cameras.

Axon has initiatives aimed at enhancing public safety in retail environments in Canada, partnering with retailers to implement safety technologies like body-worn cameras.

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