Axon Enterprise (AXON) Dips after Q1. I’ll Buy the Dip

Axon Enterprise (AXON) has now plunged 56% from last year’s highs after its Q1 results failed to inspire much confidence and spark a reversal in sentiment. This was despite sustained acceleration in growth and positive developments across the board. Investors are clearly focused on margin pressure, stock-based compensation, and near-term cash-flow noise, but I do not think those issues fully capture what is improving beneath the surface.

Axon, the leading provider of public safety technology solutions, is still growing rapidly, expanding deeper into software and artificial intelligence (AI), all while strengthening its position as a core platform for public safety. For these reasons, I will continue to buy shares at these levels.

Does Margin Pressure Justify the Sell-Off?

The main reason the stock didn’t celebrate a rather strong Q1 report seems to be that margins came in a bit weak. While the top line surged 34% to $807 million, gross margins were squeezed. In the Connected Devices segment, adjusted gross margins slipped to 50.4% from nearly 53% a year ago, while the high-flying Software & Services division dipped to 75.8%. However, that wasn’t due to a lack of demand, but rather a combination of global tariffs and the high R&D costs of scaling new product categories like counter-drone systems.

When you’re shipping hardware at the scale Axon is currently attempting in order to fulfill its ever-rising bookings, which surged 44% to over $14 billion in Q1, shipping and professional service costs bite hard. Also, Q1 cash flow was a bit messy, with operating cash flow swinging to a negative $32 million as Axon, in a similar fashion, aggressively stocked up on inventory to get ahead of supply chain uncertainty. These days, the market has been obsessed with “efficiency” over “growth at any cost,” and so these numbers provided a good enough excuse for the bears to double down.

Then there is the constant threat of stock-based compensation (SBC). For the full year 2026, Axon is projecting SBC expenses to hover around $230 million, which isn’t a small figure for Axon’s size. Axon has historically diluted its shareholders, while its “adjusted” numbers look a little too convenient for some, and rightfully so. However, I would argue that the company “taxing” its shareholders to keep its best talent from being poached by Silicon Valley is going to pay off, and the top-line and bookings growth prove this.

The AI Breakout

Despite some margin pressure, the business is fundamentally accelerating. That’s what matters most for a company like Axon, in my view. This is because Axon still has significant room to expand across key verticals. If it continues capturing these markets with its first-mover advantage, that should pay off big over the long term. It has already gone from being just “the Taser company” to becoming the primary AI operating system for public safety. In fact, the most staggering metric from the Q1 report was the 700% explosion in AI-related product revenue.

The star of the show is undoubtedly Draft One. This AI tool, which automatically generates police reports from body camera audio and video, is effectively expanding Axon’s Total Addressable Market (TAM) by addressing the single biggest pain point in policing: paperwork. In departments where Draft One is active, we are seeing hours of administrative labor vanish, allowing officers to return to the field faster. That very productivity revolution we are looking at is what drove net revenue retention to a tremendous 125%.

When a company can upsell its existing customers by 25% year-over-year while the top line is already growing at more than 30%, you’re looking at an ecosystem becoming indispensable.

A Premium Worth Paying

This brings us to the valuation, which I believe has now become surprisingly approachable for those with a multi-year horizon. On paper, even after its recent pullback, the stock still looks pricey, trading at 160x trailing earnings, compared to the aerospace and defense sector median of about 19.5x and 49x forward-adjusted consensus estimates. However, that P/E ratio is a somewhat deceptive lens for a company that is intentionally suppressing its margins by reinvesting every spare dollar into R&D, particularly in counter-drone dominance.

Instead, look at the Price-to-Sales multiple, which, while it can also be deceptive, provides a better sense of how cheap the stock can be once its margins return to normal. At approximately 11.5x forward sales, Axon is trading near a multi-year low relative to its recent historical peaks. For context, the last time the stock saw a comparable valuation compression was in mid-2022, right before shares embarked on a massive multi-year rally from a cyclical low of around $93 to an all-time high of over $880.

After all, Axon actually deserves a premium. The company is building a platform that is impossible to displace, and today’s “expensive” price should prove a discount on the future global standard for public safety. The combination of such high growth, predictable cash flows, and a mission-critical, recession-proof business model could easily facilitate a multiple expansion from here.

Is AXON a Buy, Sell, or Hold?

Wall Street appears quite bullish on AXON, despite its brutal sell-off. Specifically, AXON stock has a Strong Buy consensus rating among analysts, based on 15 Buy ratings and just 1 Hold rating. There is no analyst rating the stock a Sell. Also, AXON’s average price target of $670.47 implies 79.75% upside potential over the next 12 months.

Conclusion

Axon stock may stay messy in the near term. I understand why investors are nervous about margins and a somewhat rich SBC. Still, I don’t see the core story as broken. Axon is growing fast, its software is becoming more important, and the AI opportunity looks real. At these levels, I am comfortable adding gradually to my already significant position.