2 Factors Dragging Down Axon Enterprise Stock: Should You Buy the Dip?

Shares of Axon Enterprise (NASDAQ: AXON) have been trending lower since late 2025, and have dropped by around 30% so far this year alone. But why has this growth stock fallen into such a slump?

Chalk it up to two factors. First, earlier this year, Axon got caught up in the market's general rotation away from the SaaS (software-as-a-service) sector. Second, concerns about the stock's valuation and the company's high level of stock-based compensation have weighed on shares.

Taking a closer look at both factors, we may be able to determine whether buying the dip now or waiting in the hope of an even lower entry point is the better move.

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1. Thrown out with the SaaS bathwater

Although company-specific factors played a role in Axon's early 2026 pullback, the law enforcement technology company's shares were clearly following a course that paralleled the downslope of the SaaS sector during this period.

As you may recall, SaaS stocks were hammered this past winter due to concerns that advances in artificial intelligence (AI) technology would lead to a deflationary spiral for subscription-based software services. Why would Axon get lumped in with these stocks?

Tasers and body cameras may be Axon's best-known products, but the company also offers an array of hardware and software for law enforcement agencies. Many of the products are becoming AI-integrated as well. Hence, it makes sense that, when fears of AI disruption emerged, some investors threw Axon out with the SaaS bathwater.

SaaS stocks broadly have started to recover, but Axon has continued to struggle.

2. Axon was hammered further by lingering concerns

In late February and early March, Axon experienced a short-lived rebound. An earnings beat and better-than-expected guidance helped to counter the impact of the SaaS rotation. However, since then, shares have fallen back on a downward trajectory.

While last quarter's earnings beat may have assuaged investors' concerns that the company's revenue growth was not translating into earnings growth, other key concerns linger. Last year, its stock-based compensation expenses totaled $610.1 million, a nearly 60% increase from 2024.

Stock-based compensation will remain high in 2026, with management forecasting that it will land in the $590 million to $620 million range. But beyond that, there are concerns about the stock's valuation.

Currently, Axon trades for around 53 times forward earnings. Yes, there are plenty of fast-growing SaaS stocks sporting similarly lofty valuations. There's even another fast-growing defense products company, Kratos Defense & Security Solutions, that trades for nearly 120 times forward earnings. Still, if Axon's earnings begin to disappoint again, with investors already concerned about valuation, shares could experience another sell-off.

Buy the dip or watch and wait?

Considering the valuation issue, waiting on the sidelines for now could be the best move for interested investors. Forecasts may call for Axon's earnings to increase fourfold between 2026 and 2028, but unforeseen events like government budget cuts or policy changes could come out of left field and change the narrative.

In the near term, various events, including Axon's upcoming earnings report in May, could drive further pullbacks in the stock. If the market prices greater levels of uncertainty into the stock, that would bring it down to a more appealing entry point for a long-term position.

Thomas Niel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Axon Enterprise and Kratos Defense & Security Solutions. The Motley Fool has a disclosure policy.