Rolls-Royce shares have ripped 20% higher in the past month, bringing the five-year return to around 1,120%. A reassuring trading update at the end of April and fresh hopes for an end to the Iran conflict seem to have done the trick.
While risking sounding like a broken record, I’m bullish on this FTSE 100 stock long term. But it’s also trading close to a new all-time high and is far from cheap.
Instead, I currently prefer this S&P 500 stock that’s down 49%. Over a five-year time frame, I think it will produce higher returns than Rolls (though I continue to hold both).
Multiple high-growth markets
The stock I’m talking about is Axon Enterprise (NASDAQ:AXON). This firm started selling Tasers, then bodycams and dashcams, before moving into software offerings based around digital evidence storage.
Today, it’s branching out into various high-growth areas, including drones, virtual-reality Taser training, and artificial intelligence (AI). In Q1, Axon achieved its ninth consecutive quarter of 30%+ growth, as revenue jumped 34% to $807m.
Management also bumped up full-year guidance to a range of 30%-32%, from 27%-30% previously. And it expects a decent adjusted EBITDA margin of 25.5%.
SaaSpocalypse risk?
Despite these strong numbers, the stock is down 49% since August. Partly this reflects valuation concerns, as it got ahead of itself back then and was due a correction.
But a lot of the decline is because Axon, which now derives around 44% of its total revenue from software, has sold off along with other software stocks. Basically, it has been caught up in the AI ‘SaaSpocalypse’ fears.
However, as Axon President Josh Isner points out:
It’s so ironic we’re caught in the middle of this SaaSpocalypse fear. It’s like we are the company going on offence in AI. Our first year of selling AI products to police, we sold almost $1bn of it, for a company whose revenue was around $3bn last year.
Launched in late 2024, the AI Era Plan has become Axon’s fastest selling product ever. It’s a bundle of AI products, including Draft One, which automatically transcribes bodycam footage to draft police reports.
The appeal of this AI product is straightforward. In the US, police officers can spend around 40% of their time writing reports. Using Draft One, that goes down to roughly 20% (gaining back weeks per year).
In Q1, AI products revenue was up more than 700%. Adoption is very early.
Drones are taking off
Arguably, the biggest risk with this stock is the valuation, with a high forward price-to-earnings ratio of 55. If growth slows more than expected, the stock could sell off heavily as the market resets expectations.
However, the commercial opportunities are multiplying for Axon. For example, drones are a big growth area, as conflicts in Ukraine and Iran have shown that cheap drones can easily be weaponised for reconnaissance or direct attacks.
Dedrone, Axon’s counter-drone business, saw Q1 revenue rocket over 300% as data centres, oil refineries, nuclear facilities, and stadiums (including upcoming World Cup venues) beefed up security.
Finally, the firm is seeing rising international demand for Tasers and bodycams from Latin America, Europe, the Middle East, and Africa. Again, adoption is early.
The size of the long-term opportunity here makes me think the stock’s worth considering, despite a high valuation.
Should you invest £5,000 in Axon Enterprise right now?
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Ben McPoland owns shares of Axon Enterprise and Rolls-Royce.
