Episode Details

Axon Enterprise, Inc. (AXON) Q2 2026 — Net sales $904.4M UP 35.3% and guidance RAISED to 32-34%. Adjusted EBITDA $242.0M - but $144.3M of that is stock compensation added back. Non-GAAP EPS $1.88 beat a $1.83 bar and still fell 13.8%. Free cash flow: NEGATIVE $1.0M. Axon grew revenue 35.3%, raised guidance and beat both lines - and the stock fell 6% after hours. Free cash flow was NEGATIVE $1.0M, 60% of Adjusted EBITDA is stock compensation added back, and trailing GAAP operating margin is 0.74%. THE CALL: SELL (4/5, THE ADJUSTED PROFIT IS MOSTLY STOCK, AND THE CASH IS ZERO) — base-case value ~$310.0 vs ~$609.49 today. KEY METRICS: - CALL: SELL 4/5, fair value ~$310 vs the $609.49 close (-49%), far below the Street's $658.56 average (+8%). Base $289 (revenue compounds 17% a year for a decade to $13.6B, free cash flow ramps to 20% of revenue), bear $112 (growth halves to the low teens, cash settles at 14%), bull $481 (nearly 20% compounding and a 25% terminal cash margin, better than Axon has ever earned). Exit-multiple cross-check on 2029 post-stock-compensation EBITDA: $240. Today's price sits ABOVE the top of our entire three-case range. - REVERSE-DCF: WHAT $609.49 ALREADY REQUIRES. At a 9.5% discount rate the market is asking Axon to compound revenue at roughly 25% a year for ten straight years - to $25.9B, nine times today's revenue - AND to end that decade converting 24% of revenue into free cash flow. At a still-outstanding 20% growth rate the required cash margin is about 36%. Axon converted MINUS 0.1% in the June quarter and MINUS 3.2% across the first half. The Street's $658.56 needs roughly 26%. - THE ADJUSTED PROFIT IS MOSTLY STOCK. Stock-based compensation was $144.3M in the quarter - 16.0% of ALL revenue and nearly five times the $29.4M of GAAP net income ($71M in SG&A, $62M in R&D, $11M in cost of sales). That is 59.6% of the $242.0M of Adjusted EBITDA. Strip it out and the quarter earned about $98M of EBITDA. Full-year 2026 guidance is $590-620M of stock compensation against roughly $940M of Adjusted EBITDA, including ~$280M for the broad employee stock plan and the CEO performance award. Diluted shares rose only 0.6% (82.1M to 82.5M) - the dilution is deferred, not absent. - THE FIRST OPERATING PROFIT LEANED ON A TARIFF REFUND, AND THE CASH NEVER ARRIVED. GAAP operating income of $46.8M rose $47.8M year on year and the company says it was driven by higher revenue AND global tariff refunds - $47M of cash refunds landed in the quarter. Connected Devices gross margin improved 330bp to 51.9% (refund-driven) while Software & Services gross margin FELL 430bp to 71.3%; total gross margin was exactly flat at 60.4%. Inventory rose 42.3% to $486.6M and contract assets 37.7% to $1,047.4M in six months, both faster than revenue, while cash plus short-term investments fell $1.03B to $673.4M against $1.1B of net debt. - THE BULL CASE IS REAL AND IT IS THE BACKLOG. Annual recurring revenue $1,639M, up 38.5% - faster than the 35% total. Net revenue retention 126%, up from 124%, with what management calls de minimis attrition. Future contracted bookings $15.1B, up 41%, with 20-25% expected to convert in the next twelve months. Platform Solutions revenue up 123% to $149.8M with Dedrone past $100M, AI Era revenue up nearly 700%, and two nine-figure city contracts including the largest single TASER order in company history. Trailing twelve months: $3,219M of revenue and $23.8M of GAAP operating income - a 0.74% margin - against a $49.1B market value. What to watch: UP: a September quarter with free cash flow above $100M, contract assets growing slower than revenue, or Software & Services adjusted gross margin back above 78%. BEAR: another negative-cash quarter, inventory above $550M, or 2026 stock-compensation guidance above $620M. Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.