Axon Enterprise is currently navigating fresh inquiries regarding its competitive landscape, yet its earnings performance remains robust and promising.
In this engaging podcast episode, Motley Fool analyst Jason Moser joins host Mary Long to explore:
- Axon earnings report and the significant headline that led to a stock dip.
- The transformative role of artificial intelligence in law enforcement.
- Indicators of success for TJX Companies.
Following that, Motley Fool analyst Emily Flippen and host Ricky Mulvey delve into Dutch Bros, a rapidly expanding coffee chain with a notably high valuation.
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A comprehensive transcript is available following the video.
This video was recorded on Feb. 26, 2025
Mary Long: Although some retailers are facing challenges, others are thriving. Welcome to Motley Fool Money. I’m Mary Long, joined today by Jason Moser. Thanks for being here, J-mo.
Jason Moser: Thanks for having me, Mary. I’m excited to be here.
Mary Long: I always enjoy our discussions, and I especially appreciate you joining today, considering you’ve had a packed morning. Earlier, you spoke with Axon President Josh Isner. Let’s kick things off there, as Axon released its earnings report yesterday. We’ll share a segment of your conversation in Friday’s show. Can you give us a sneak peek? Any highlights from your chat with Josh?
Jason Moser: I don’t want to spoil too much; I want listeners to tune in on Friday. It’s always great catching up with Josh, and this marks the second time we’ve discussed the company’s earnings and strategies. The excitement surrounding their enterprise customers and international prospects is palpable. They recently secured the largest deal in the company’s history with a global logistics provider. Yes, I did inquire about the provider’s identity, but they’re keeping that under wraps for now.
That’s part of the expansive enterprise opportunity, which I found very encouraging. One of the most notable aspects was their significant increase in the total addressable market opportunity. Typically adjusted every two years, they announced an adjustment in Q1 this year due to acquisitions. Initially raised from $50 billion to $77 billion, the most recent report indicated a staggering increase to $129 billion. I asked Josh about the driving factors behind this change, but we’ll need to make listeners wait for more details until Friday’s show.
Mary Long: Now, that’s how you tease! Axon is a prominent name in the Motley Fool Stock Universe, but some listeners may not be familiar with the company. In brief, Axon is focused on developing law enforcement technology aimed at making traditional firearms obsolete, with innovations primarily in TASER and VR technology. You mentioned earlier that the company released its earnings report yesterday after the market closed, exceeding revenue expectations with a remarkable 37% increase. They also saw growth in gross margin and an impressive 79% rise in cash flow, along with strong future guidance. You provided us with some insights from your conversation with Josh earlier, but was there anything else particularly noteworthy from their earnings report that you’d like to highlight?
Jason Moser: You’ve touched on several key points, particularly regarding their consistent growth. This company has maintained a strong growth trajectory over a prolonged period, and for good reason. Their shareholder letter included some remarkable milestones. They achieved their 12th consecutive quarter of revenue growth exceeding 25%, and they’ve now surpassed the $2 billion mark in annual revenue, which is incredibly promising.
What stands out about Axon is the reliability of their business model. Their annual recurring revenue has surged by 37%, now reaching $1 billion. This is a significant milestone that highlights their success in retaining customers and expanding their relationships with them. Their net revenue retention rate remains impressive at 123%, demonstrating their ability to attract new clients while effectively deepening existing customer relationships.
Mary Long: Let’s delve deeper into that retention rate of 123%. This figure indicates that the average Axon customer is spending 23% more than they did a year ago. What strategies does Axon employ to enhance relationships with existing customers? What specific areas are these customers investing more in?
Jason Moser: I often liken Axon to the Apple of the public safety sector, and I mean this in the best way possible. They excel at creating innovative hardware, continuously refining it, and then offering software and services that enhance the utility of that hardware and the data it generates. When we talk about how customers are increasing their spending, the numbers are compelling. In 2024 alone, they shipped over 200,000 TASER devices, over 300,000 body cameras, and more than 900 million cartridges, which are essential for the TASER devices. This sets up a classic razor-and-blade business model that we find appealing. Furthermore, their Axon Cloud and services revenue rose by an impressive 44%, totaling $806 million.
They continue to invest heavily in the AI sector, which I believe will play a crucial role in their future growth. Their AI Era Plan provides customers with access to all of their current and future AI developments. Notably, they secured their first 10 deals related to the AI Era Plan in the fourth quarter of the year. This strategy not only attracts customers but also helps retain them by continuously creating new services and insights that enhance the value of being part of the Axon ecosystem.
Mary Long: The AI Era Plan is indeed fascinating. During the earnings call, Axon highlighted five major innovations introduced in 2024, the first being the incorporation of artificial intelligence in policing. While I understand the application of VR in law enforcement training, I’m curious about the specifics of AI in policing itself. Axon refers to this as AI-driven public safety. What does this entail, and how does it integrate into the AI Era Plan?
Jason Moser: I think this is a topic worth watching as it evolves over the coming years. Axon operates in two distinct areas: hardware and the accompanying software and services that enhance its utility. A significant aspect of the AI Era Plan involves a service called Draft One, which functions essentially as a transcription tool for law enforcement officers. It allows them to convert audio and video content generated during incidents into comprehensive police reports.
Traditionally, crafting a police report can take officers 3-4 hours, but the Draft One service streamlines this process tremendously, enabling them to complete reports in a fraction of the time. The feedback from customers has been overwhelmingly positive, as it saves them numerous hours. Moreover, this service is gaining traction in the judicial system; prosecutors and litigators are recognizing its effectiveness. A pressing concern in the realm of AI today is reliability. The fact that legal professionals are finding these police reports to be credible is a very encouraging sign.
Additionally, Axon is integrating various cameras and sensors, leveraging the collected data to drive insights and improvements. Their investments in AI are yielding positive results. Furthermore, their acquisition of Fusus earlier in 2024—a deployable and automated real-time crime center platform—demonstrates their commitment to utilizing connected devices for actionable insights and rapid data processing. This really underscores the significance of their AI initiatives.
Mary Long: Axon’s current stock price reflects high expectations, which may be justified, but they are trading at approximately 90 times forward earnings. Regardless of how you analyze it, this is a premium price. How do you assess what a fair valuation for Axon is at this point?
Jason Moser: That’s a valid point. It does seem that you’re always paying a premium for a company like this, and there’s a good reason for it. A significant factor here is the expansive market potential we continue to observe. With the company recently surpassing the $2 billion revenue mark and a total addressable market estimated at around $130 billion, even capturing a small share of that speaks volumes about its growth potential. The recurring revenue model, combined with their installed base of hardware, positions them well for the future. The evolution of the TASER product line, akin to the progression of Apple’s iPhone, is noteworthy, as they continue to iterate and innovate.
I believe Axon is on the path of creating a similar legacy with its TASER products and other innovations. However, the primary risk lies in the company’s valuation. We’ve seen volatility in the stock price, particularly following negative headlines. As a shareholder, my approach is to gradually build a position in a company like this when opportunities arise, thereby mitigating the valuation risks that will likely persist for the foreseeable future.
Mary Long: Before we transition to our next topic, let’s address the significant stock pullback you mentioned, particularly the headline that triggered it. After the earnings report, Axon experienced a nearly 30% drop within three trading days, largely due to severing ties with their former partner, Flock Safety, an automated license plate reader company. This prompted Wall Street analysts to downgrade their ratings, as there’s concern that Flock Safety might now become a competitor. Can you explain the nature of Axon’s previous relationship with Flock Safety? How crucial was this partnership to Axon’s overall value proposition, and how do you see this change impacting the company moving forward?
Jason Moser: This situation exemplifies the distinction between headlines and the reality of the situation. I discussed this with Josh during our conversation, and he also addressed it during the earnings call. The partnership with Flock Safety, which began in April 2020, has been mutually beneficial for both companies.
My inquiry was whether this shift indicates a strategic pivot for Axon to develop its own solutions or if it simply reflects a need for better negotiation terms with Flock Safety. From what I gathered, it seems to be the latter. Both companies still wish to collaborate but require more favorable terms that benefit both sides. This is a classic case of negotiation dynamics at play. I wouldn’t be surprised if we see headlines in the near future indicating that Axon and Flock Safety are working together again. Regardless, if the worst-case scenario materializes and they part ways permanently, I believe it would be a greater loss for Flock Safety than for Axon. Axon possesses ample resources to develop the necessary technology independently, but I suspect that this relationship will ultimately continue.
Mary Long: Now, let’s wrap up with some insights from the retail sector. Earlier today, we received earnings reports from TJX, the parent company of T.J. Maxx, Marshalls, and HomeGoods. They reported fourth-quarter sales of $16.35 billion, slightly below last year’s figures, and fourth-quarter profits remained flat compared to the previous year. Management anticipates modest growth in comparable sales for the upcoming year. While these results may seem lackluster, Wall Street responded positively, with the stock rising about 3% this morning. Given the current retail environment, what does success look like for brick-and-mortar retailers like TJX?
Jason Moser: The results were decent, not groundbreaking, but they align with our expectations in the current retail climate. TJX is a company that prioritizes offering value to consumers. Brands like T.J. Maxx and Marshalls are designed to attract cost-conscious shoppers.
To gauge success for TJX, it’s essential to focus on top-line growth. The company has managed to grow revenue at a little over 6% annually over the past five years, which is promising, especially given their value-oriented focus. More significantly, net income has increased by over 8% during the same period, resulting in more than $4 billion in free cash flow last year. Their strategy of catering to value-seeking consumers across a diverse array of store concepts really plays to their advantage, allowing them to leverage economies of scale effectively.
Mary Long: Another noteworthy retail story is the impending closure of Party City. This chain, which was a staple for many, including myself, has faced significant challenges. After filing for bankruptcy restructuring in 2023 and shedding about $1 billion in debt, the company still found itself mired in $800 million of debt, leading to its second bankruptcy filing in December. While a handful of franchise locations will remain, the majority of Party City stores are closing. According to Coresight Research, which tracks retail closures, the U.S. is projected to see around 15,000 store closures in 2025, surpassing the 10,000 closures recorded during the peak pandemic in 2022. What do you believe is driving this trend? Is this primarily an e-commerce issue, or are there other factors affecting physical retail?
Jason Moser: I don’t think it’s solely an e-commerce issue, although that’s certainly a significant factor. Many brick-and-mortar retailers are striving to evolve into omnichannel businesses, aiming to meet consumers wherever and whenever they want to shop. Additionally, companies like Party City often focus on products that fall under the “want” category rather than the “need” category. In contrast, retailers like TJX focus more on essential items, emphasizing value and necessity.
Party City’s reliance on large physical spaces may not align with current consumer preferences. The trend towards omnichannel retailing emphasizes flexibility and convenience, which many consumers prefer today. It’s not merely a case of “death by a thousand cuts,” but rather a combination of factors, including the shift to e-commerce, changing consumer preferences, and the necessity for retailers to adapt to new shopping behaviors.
Mary Long: It’s always a pleasure to have you, Jason. Thank you for joining us today!
Jason Moser: Thank you, Mary!
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Mary Long: Selling sugar and caffeine can be a lucrative business. My colleague Ricky Mulvey recently spoke with Motley Fool senior analyst Emily Flippen about the rapidly growing coffee chain, Dutch Bros. Its stock has surged around 160% over the past year, and they discussed its business model, valuation, and unique offerings like the chocolate-covered strawberry mocha.
Ricky Mulvey: In preparation for this discussion, I visited a Dutch Bros location at 9:15 AM on a Monday. I waited in line and managed to enjoy about a third of a chocolate-covered strawberry mocha to fully appreciate the experience. This coffee chain is gaining immense popularity, and I wanted to explore this with you, Emily. Have you had a chance to visit a Dutch Bros? What was your impression?
Emily Flippen: Ironically, I haven’t been to a Dutch Bros yet. They’re expanding eastward, and while I’m currently in Maryland, I grew up in Texas. When I recently visited Texas, I planned to check one out but realized they don’t even offer brewed coffee, which is my go-to. That said, I believe calling them a coffee chain is somewhat generous. They have a diverse product lineup that includes protein shakes, smoothies, and energy drinks, alongside their coffee offerings.
Ricky Mulvey: You’re not exactly lining up for sweet cereal sips that promise to taste just like the sugary milk left at the bottom of a cereal bowl.
Emily Flippen: Only if I’m aiming to replace lunch with it!
Ricky Mulvey: This is pertinent for investors, as Dutch Bros’ value and sales are soaring. In contrast, Starbucks is experiencing a decline. Dutch Bros is aggressively expanding its locations while simultaneously reporting nearly 10% growth in same-store sales at company-operated locations, whereas Starbucks has seen a 4% decline in the same metric. What accounts for this disparity? Why is Dutch Bros thriving while Starbucks struggles amidst the ongoing transformation under Brian Niccol?
Emily Flippen: Several factors contribute to this trend. One is innovation; Dutch Bros has a more dynamic product lineup and is quicker to adapt its menu by introducing new items and removing underperforming ones. In contrast, Starbucks seems to have become somewhat stagnant, struggling to drive transaction growth. Additionally, Dutch Bros may be more appealing in today’s cost-conscious environment, which has also played a role in this divergence.
However, it’s important to note that the coffee industry is highly competitive, with numerous local coffee shops and alternative beverage outlets emerging. Starbucks faces a brand image challenge that is reflected in their declining same-store sales, whereas Dutch Bros is perceived as trendy and fresh, contributing to its rising popularity.
Ricky Mulvey: After my visit to Dutch Bros, I continued on to Costco for some tire issues, but there was still a lengthy line at Dutch Bros by 7 PM. It seems like their innovative drinks, like the 911 with six shots of espresso or the double torture featuring extra double shots of espresso, vanilla, and chocolate milk, are driving the demand. The drive-through model accounts for 90% of their business. Given that, why is Dutch Bros moving away from traditional coffee shop experiences?
Emily Flippen: I would flip that question: why is Starbucks forcing customers to enter stores and stand in line for their coffee? There’s a clear demand for efficiency and convenience in today’s market, and the drive-through model caters perfectly to that need. While this model may not appeal to everyone, the impressive nearly 10% growth in same-store sales at company-owned stores indicates that consumers prefer the convenience of drive-through or mobile ordering over traditional sit-down experiences. For Dutch Bros, this strategy also translates to lower real estate costs, as they don’t require large spaces for seating.
Ricky Mulvey: While Dutch Bros’ stock has surged, its valuation remains complex. Earnings have skyrocketed tenfold over the past year as the company becomes more profitable. However, with 80-90% of sales going towards coffee beans, rent, and labor, it’s not clear if we can expect significant margin expansion. Would you agree with this perspective?
Emily Flippen: I’d say you might be mistaken here. This is indeed a margin expansion story. While some costs are inherent to the business, the company’s growth strategy involves expanding its store count by over 15% annually as they push eastward. Although there are challenges in this expansion, management is focused on improving profitability. Currently, they are a relatively new player in the field, with GAAP net income margins around 2-3%. However, I believe they have substantial room for margin growth compared to their competitors.
Long-term, I see the potential for better margins than those of Starbucks or Chipotle, primarily due to their smaller footprint and lower overhead expenses. We’re not observing this in earnings yet because they are still in an aggressive growth mode, investing heavily in marketing and capital expenditures. As they work towards profitability, we should expect to see more favorable margins in the future.
Ricky Mulvey: Let’s discuss stock issuance because Dutch Bros has a history of issuing shares. Although management claims they won’t, there are indications of stock issuance for general corporate purposes. Should long-term investors be concerned about dilution?
Emily Flippen: Yes and no. Historically, Dutch Bros has been a dilutive business, but as a growth company, they have opted to raise capital through public markets. This strategy is similar to what we’ve seen with companies like Planet Fitness. While dilution has been a concern, management has indicated that they expect to be self-funding moving forward. However, given their ambitious expansion goals, I remain skeptical about whether they can achieve that without raising additional capital.
Ultimately, if they can become truly self-funding, dilution should slow down significantly. But until then, I think it’s reasonable for investors to be cautious regarding potential dilution.
Ricky Mulvey: If price-to-earnings isn’t the best metric to evaluate Dutch Bros, what multiples should we be focusing on to assess their valuation?
Emily Flippen: It’s not that price-to-earnings is inherently flawed; rather, it must be viewed in the context of the company’s long-term potential. When assessing a business like Dutch Bros, I focus on their future cash generation capabilities. Current earnings may not accurately reflect their long-term earning potential. I anticipate that Dutch Bros will achieve net income margins closer to 15% in the future, which will significantly influence their valuation.
The key metrics to consider are their store expansion rate and same-store sales growth. They need to maintain double-digit expansion while achieving competitive same-store sales growth. If they can successfully navigate these challenges, the long-term outlook could be very promising.
Ricky Mulvey: I conducted a valuation analysis, which, to be frank, was a bit simplistic, like a quick rough estimate. However, hypothetically, if Dutch Bros quadruples revenue and expands its store count significantly, it could be considered undervalued. Conversely, if they only double their revenue while continuing to issue stock and maintain a high earnings multiple, investors could find themselves breaking even. As you assess Dutch Bros’ growth story, what scenarios are you considering?
Emily Flippen: I’m considering several scenarios. When investors apply an earnings multiple to a company, they’re implicitly making certain assumptions about operating margins. Understanding where those margins are headed is critical for a sound investment decision.
Ricky Mulvey: I projected around 10% margins for my analysis.
Emily Flippen: That assumption