Axon stock is sliding for a second day, with the initial trigger a downgrade by Northcoast Research analyst Keith Housum, who highlighted a falling out with Flock Safety, a "partner turned competitor." The innovator of the Taser and cloud-based evidence management for law enforcement suffered a second downgrade on Thursday from Craig-Hallum.
The new worry for Axon: While Q1 is typically a slow one for new contracts, the research firm says, there's a risk that Axon's fast-growing business serving federal government agencies could take a breather amid hiring freezes and spending cuts.
Axon said on the Nov. 7 Q3 earnings call that four of the top 10 domestic deal in the quarter came from federal customers, highlighting the Department of Homeland Security, Internal Revenue Service and Amtrak.
Axon will likely address the gist of both downgrades in its Feb. 25 Q4 earnings letter and call with analysts.
Axon Stock Downgrade
In his research note, Housum said his firm is moving to a neutral rating "on valuation and concerns FY25 guidance will not live up to the whisper."
He noted that the partnership with Flock Safety has "turned south." He added: "Over the medium-term, it could impact the growth trajectory of its recent Fusus acquisition."
Housum wrote that Flock is "threatening to charge new customers $10,000-$50,000 to build application interfaces (API's)" to share automated license plate reader (ALPR) data with Fusus.
Axon bought Fusus last year for its real-time crime center platform, which integrates video feeds, data and signals from Axon body cams, drones, fleet cam, Tasers and third-party devices. All of the feeds are unified into a single pane of glass for law enforcement to manage a developing situation.
The upshot of Flock's threat is that a "capability that was historically done for a nominal fee" may present "a significant cost to adopt Fusus going forward."
Housum adds any impact on Fusus is immaterial to Axon's financials in the near-term. In the longer-term, the fight with Flock could be "a small threat to one of Axon's growth opportunities."
Axon Response
Axon forwarded a statement to Investor's Business Daily on Wednesday, saying the company "is committed to providing public safety agencies with the ability to integrate the best technology for their needs."
"However, as Flock has increasingly imposed artificial barriers on integrations and access to agency-owned data, we have made the unfortunate decision to terminate our existing partnership with Flock."
Axon-Flock Partnership
Flock Safety is a venture-backed startup which Axon announced a partnership with in April 2020. At the time, Axon said the partnership would make it easier and more cost-effective for police departments to deploy a network with both fixed and mobile ALPR capabilities.
Axon touted Flock's "industry-leading fixed ALPR solution." Axon also announced a minority investment in Flock, "with the ability to commit additional capital over time through warrants conditional on certain partnership performance metrics."
The news release highlighted Flock's wireless camera systems with "the world's first Vehicle Fingerprint technology to identify the unique features of a suspect vehicle, including make, model, color, and license plate." The technology contributed to a reduction in vehicle thefts of up to 60% reported by local police in some cities, Axon said.
Flock: 'Disappointed' In Axon Decision
On Jan. 31, Flock Safety CEO Garrett Langley wrote that Axon had made "a surprise decision to end our partnership and cut off the API access that law enforcement depends upon."
Langley continued: "Axon decided that being open and collaborative is 'no longer in Axon's best interests,' and no additional reason was given to us."
Both Axon and Flock said that nothing will change for existing customers. But Flock said that Axon will no longer support new mutual customers starting July 24.
"Many companies in the industry are aligned that the world is safer when we all work together," Langley said.
Morgan Stanley Backs Axon
In a Thursday note, Morgan Stanley analyst Meta Marshall kept an overweight rating and 700 price target for Axon stock, citing belief that 25% to 30% revenue growth will be durable for the "dominant vendor in the space."
Referring to Axon's Draft One generative AI product that writes the first draft of police reports in seconds, using auto-transcribed audio from body-worn cameras, Marshall called it a "killer app" that will "increase adoption of higher priced software bundles."
Marshall also mentioned a rumor that Walmart is piloting Axon's body camera as it aims to address safety and theft issues.
The Morgan Stanley analyst saw Wednesday's sell-off as "over done," but Marshall is watching the impact of the Flock partnership deterioration.
"Given Axon was the one to terminate the relationship, we view it as more than likely that they have a workaround."
Marshall notes that Axon said its Fusus acquisition boosted its total addressable market by $13 billion.
Sell Signal On Axon
Axon slid 11.6% to 524.78 in Thursday afternoon stock market action. On Wednesday, Axon stock sank 16.4%, flashing a sell signal as it knifed through 50-day moving average.
On Tuesday, Axon had cleared a cup-with-handle buy point. Ahead of this week's short-lived breakout, Axon had been featured as IBD Stock Of The Day on Feb. 10, highlighting momentum for generative AI-related sales and its drone business.
Wednesday's action was an expectations breaker on the heels of a breakout. Those who bought Tuesday saw multiple, clear signals to exit.
