Why Axon Enterprise Stock Fell in February

The February sell-off in shares of Axon Enterprise (NASDAQ: AXON) began on fears that the company's long streak of quarterly beats might be coming to an end. That didn't happen, but the stock never recovered post-earnings.

Shares of Axon ended the month down 19%, according to data provided by S&P Global Market Intelligence.

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Headwinds on the horizon?

Axon has been a fantastic growth stock, up more than 550% over the past five years. The company sells tasers, body cameras, and software systems to local law enforcement agencies, and has done a great job through the years of both adding to its customer count and finding new products to offer existing clients.

That has come in part due to the use of resale partners, and Axon shares dropped in mid-February after questions were raised about one of those partnerships. Northcoast analyst Keith Housum downgraded Axon shares ahead of earnings in part due to the fallout from Axon ending its partnership with Flock Safety, which Housum said could limit the upside at least in near-term.

A week later, Axon reported results that provided no reason for concern. The company beat both top- and bottom-line expectations, generating year-over-year revenue growth of 34% and earnings growth of 84%. Net revenue retention improved by 100 basis points to 123%, implying that existing customers are expanding the amount they are buying from Axon.

Axon is also becoming more profitable as it grows. Adjusted gross margin improved by 120 basis points from a year ago and operating cash flow grew by 79% to $250 million. The company also finished the quarter with $10.1 billion in future contracted bookings, and set full-year 2025 revenue guidance well above what Wall Street was expecting.

But the stock was little changed following earnings and ended down for the month.

Is Axon stock a buy?

Axon's growth story is becoming the stuff of legends. In 2024, the company grew revenue by more than 30% for its third consecutive year. The 34% revenue growth in the quarter marked the 12th consecutive quarter of at least 25% year-over-year sales growth. And the company post-earnings boosted its estimate of its total addressable market to $129 billion due to the strong reception it is seeing from non-government clients in search of security solutions.

That said, with the stock priced at more than 90 times expected earnings, a lot of that future growth is priced in. And the Northcoast warning, even if a false alarm in the quarter, served as a reminder to investors that highly valued companies can be fragile investments. It doesn't take much to send a stock priced for perfection into a tailspin.

The long-term growth story remains intact, but the outlook for the near future is a little more murky than it was coming into the month. Investors buying in today can be rewarded, but they should brace themselves for increased volatility up ahead.

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Lou Whiteman has positions in Axon Enterprise. The Motley Fool has positions in and recommends Axon Enterprise. The Motley Fool has a disclosure policy.