The S&P 500's best stock performer this week is a surprising AI beneficiary

By Tomi Kilgore

Axon's stock has soared to a record, but Baird says it's still a 'top idea,' as it can stand out in a tougher economy

The stock that's the biggest S&P 500 gainer this week is technically part of the industrial sector, so it may come as a surprise to some that it's getting a big boost from artificial intelligence.

"One year ago, I shared with you our vision for generative-AI applications as we saw ... commercially available LLMs, large language models, coming to market," said Rick Smith, founder and chief executive of Axon Enterprise Inc., according to an AlphaSense transcript of a post-earnings call with analysts.

"I told you we'd be ready to catch the ball" when the technology matures, Smith added.

Axon's stock (AXON) has soared 24.3% this week, compared with the second-place 22.9% surge in the stock of cybersecurity company Fortinet Inc. (FTNT).

Meanwhile, the S&P 500 SPX has slipped 0.4% on the week.

The highlight of the week was the two-day, 24.9% surge and a record close for Axon's stock on Thursday, after the company reported record second-quarter revenue and raised its full-year outlook.

"Demand for our latest Taser and body camera products remained strong in the second quarter, driving growth in Taser and Sensors & Other revenue, while adoption of premium software offerings continued to fuel growth in Axon Cloud & Services," the company said in its late Tuesday earnings report.

The 31-year-old Arizona-based company has a market capitalization of $27.9 billion, and its stock is a component of the Industrial Select Sector SPDR exchange-traded fund XLI. The company sells Tasers, body and in-car cameras, productivity software and digital-evidence management services to federal, state and local first responders.

"I think we're at the forefront in several technological areas," CEO Smith said on Axon's earnings calls. adding: "We are positioning ourselves as the indisputable leader in delivering the power of AI in practical, usable applications to our customers."

During the second quarter, the company launched its Draft One offering, a generative-AI service that writes the first draft of a police report directly from body-camera recordings.

"Our customers' response to Draft One is better than anything I've ever seen, better than we could have imagined," Smith said.

While Draft One has generated more than $100 million in bookings, the company has acknowledged that it hasn't yet contributed to quarterly revenue.

But as Smith noted, for Draft One to work, customers have to use Axon body cameras and the Response+ connectivity service.

Net sales for the second quarter jumped 34.6% to a record $504.1 million, above the FactSet consensus of $478.4 million, to mark the 20th straight quarterly beat.

Product sales climbed 26.4% to $295.2 million and services sales hiked up 48% to $208.9 million, as cloud revenue ran up 46.8% to $194.7 million, all beating expectations.

Future contracted revenue, or backlog, was $7.35 billion at quarter-end, up 4.5% from the first quarter and up 40.7% from last year.

For 2024, the company raised its revenue guidance range to $2 billion to $2.05 billion, up from $1.94 billion to $1.99 billion.

Baird analyst William Power reiterated his buy rating on the stock, saying it remained "one of our top ideas, and we believe it could stand out in a tougher macroeconomic environment."

J.P. Morgan's Joseph Cardona said that while the revenue guidance beat even some of the more optimistic expectations on Wall Street, he believes it was the backlog disclosure that "caught investors by surprise."

He reiterated the overweight rating he's had on Axon's stock for the past 15 months.

Of the 15 analysts surveyed by FactSet who rate the stock, 14 are bullish and one is neutral.

The stock has rallied 40.7% year to date, while the SPDR industrial ETF has gained 8.7% and the S&P 500 has advanced 11.7%.

-Tomi Kilgore

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08-09-24 1206ET

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