Axon: Long-Term Outlook Is Strong Despite Federal Budget Worries

Key Points

• Axon Enterprise was outperforming the market significantly before analysts' downgrades led the stock to fall on its face. 
• I'll examine how much weight there is behind federal budget-cut concerns.
• Axon's earnings show the business remains very strong, and the company massively raised its expectations for its total addressable market.

Shares of industrials company Axon Enterprise NASDAQ: AXON were off to a great start in 2025 until recently. Shares got crushed for four straight trading days from Feb. 19 to the 24th. The stock fell mainly because analysts downgraded it. They had concerns about valuation and the possibility that the company could be hit hard by budget cuts from the federal government. Overall, shares fell nearly 30% over that four-day trading period.

However, the company stopped the bleeding with its Q4 earnings report on Feb. 25. Shares rose over 16%. Revenue and earnings were better than expected, and the company announced a huge new customer relationship. So, what should investors make of Axon? Is this stock poised to continue being a long-term winner, with shares up over 300% in the past three years?

Breaking Down Federal Budget Cut Concerns

The federal budget cut question was a clear area of emphasis on the company’s Q4 earnings call. Axon President Josh Isner stated there was “no real cause for concern” for Axon’s business. He reframed the idea, mentioning it could lead to the company winning more federal contracts as federal law enforcement examines which vendors it is getting the most value from. He ended by saying, “There's more opportunity than risk right now for us in the federal space." This is an expected management response, but a deeper dive is warranted.

First off, it is important to try to understand how much of the company’s revenue comes from the federal government. Around 84% of Axon's revenue comes from the United States. We also know that 4 out of the 10 largest domestic booking companies in Q3 came from federal agencies. As a rough estimate, we could then say that around a third of the company's revenue comes from the federal U.S. government. This is clearly a significant amount, and a large reduction in these relationships could have a big impact on the business.

The Pentagon is notably working to reallocate 8% of its total budget over the next five years to higher-priority programs. This could result in around $300 billion in spending shifts. This directive is different from any cuts the Department of Government Efficiency (DOGE) may suggest. On the other hand, the House of Representatives recently passed a budget bill. It includes a $300 billion increase for national defense and border spending in fiscal 2025. The bill is likely to pass in the Senate as well, given the Republicans' 53% control of the chamber. This could largely balance out these other measures aimed at changing defense spending.

The overall theme in spending surrounding the new administration has been cutting bureaucracy. Axon partners with governments in technology and advanced hardware. So, cutting bureaucratic spending doesn't exactly fit with that role. It is also important to note that Axon raised its estimated Total Addressable Market (TAM) by 68% to $129 billion. Within this, it sees federal U.S. government spending accounting for less than 10%. Given all this information, the concerns surrounding Axon’s business being greatly hurt by federal cuts are overblown, in my view.

Axon's Earnings Impress

The company’s latest earnings shone on all fronts. Its $2.08 adjusted earnings per share came in over 48% higher than the $1.40 expected. This adjusted EPS figure was an increase of 81% from a year ago. Revenue continued to grow at an incredibly strong clip of 33%. The company also secured its biggest enterprise deal ever. Enterprise bookings tripled compared to last year. This adds to the idea that the company is growing less reliant on the federal government. Overall, the company’s future contracted bookings of $10.1 billion are nearly five times higher than the revenue it generated in 2024.

Putting Axon’s Valuation in Context

A discussion of Axon can’t be complete without considering its valuation. The company is trading at a forward-adjusted price-to-earnings (P/E) multiple of 100x. That is a big number, but the company has achieved incredible success so far, and it's still less than 2% penetrated into its TAM. Its new forward P/E is also around 17% less than markets were willing to pay on Feb. 18th.

Additionally, two Wall Street analysts still see significant near-term upside. The average of new targets from JPMorgan and TD Cowen shows an implied upside of nearly 26% based on its 3 p.m. EST price on Feb. 26. Overall, I think Axon still has a strong opportunity to keep appreciating long-term, although its valuation may lead to near-term volatility.