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Want to Beat the Dow Jones? Buy and Hold This Growth Stock

Motley Fool - Tue Aug 2, 6:52AM CDT

Compared to other market indices, the Dow Jones Industrial Average isn't having such a bad year. The 30-stock index of some of the country's largest corporations is down a little less than 10% after Monday's close -- barely out of correction territory. But that's much better than the S&P 500, which is down 13.6% and at one point had dipped over 20% from where it started. So, too, when looking at the tech-heavy Nasdaq 100, which continues to nurse losses over 20%.

Beating the Dow is no small feat these days, while high inflation, elevated energy prices, and rising interest rates signal a recession is upon us. Yet difficult doesn't mean impossible, and investors should be thinking long term -- as in decades ahead, not the next few months.

With that frame of reference, topping the Dow's performance is well within reach, and Axon Enterprise(NASDAQ: AXON) is one stock that can help you achieve it.

A proven record for innovation

The maker of Taser conducted energy devices -- more commonly called stun guns -- is in a new growth phase, as demand for its full suite of less-than-lethal products and services has never been higher.

Calls for greater police accountability, and law enforcement officials looking for better methods of protecting officers, have put Axon's Tasers, body cameras, and evidence management systems front and center for agencies at the local, state, and federal levels.

Police officers putting on body cameras.

Image source: Axon Enterprise.

Taser sales jumped 19% in 2021 and were up another 15.5% in the first quarter of 2022, while software and sensor sales, which encompass Axon's body cameras and cloud-based solutions, were up 35% and 48%, respectively. Bookings for Axon, which reflects future business over the average five-year contract Axon typically signs, were up 52% year over year.

The strong growth is representative of the innovations and product extensions Axon offers to keep its equipment and services relevant in an ever-changing market. It's grown from a stun gun maker to hybrid software-as-a-service stock.

Yet not every idea is met with enthusiasm. Axon recently proposed Taser-equipped drones to help prevent school shootings, an idea that was met by derision from its own artificial intelligence ethics board. A majority of its members resigned after Axon indicated it was moving forward with the idea despite the board having signaled opposition to the proposal. Axon ended up killing the project.

A growing, but crowded, field

Although Axon Enterprise is the dominant player in many of the fields it targets, it's not without competition. Motorola Solutions is growing rapidly, seeing 28% gains in sales of video security and access control, though with first-quarter segment sales of $113 million, it's only a quarter of the sales Axon generates for similar products.

Digital Ally has long been a thorn in Axon's side, with the two suing each other for patent violations, but its effectiveness and competitive threat has been severely eroded over time, and it's in danger of losing its Nasdaq listing as its stock trades below $1 per share.

There are other bigger, better-financed rivals, too, depending on the segment involved, including companies like IBM and Oracle on the software side while even giant defense contractors like Northrop Grumman are considered one of dozens of competitors in computer-aided dispatch and records management. Motorola is a particular threat in both of those areas, too.

Paying up for quality

Although Axon's stock is down 45% from the all-time high it hit back in February 2021, the stock is not cheap by traditional metrics. It trades at more than 200 times trailing earnings, 47 times next year's estimates, and almost 150 times the free cash flow it produces.

Axon has never been a cheap stock in that respect, but Wall Street still expects earnings to grow at a compounded 19% annually for the next five years. In a market the Taser-maker estimates is a $52 billion opportunity, it has the chance to acquire more market share due to its industry-leading position and to beat the Dow index in the process.

Once a department enters into the Axon ecosystem, it becomes difficult to leave. For example, the Tasers seamlessly connect with Axon's cloud services, allowing for camera and dispatch integration and automatic evidence recording and management. You might find Axon Enterprise to be just as sticky in your portfolio.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Axon Enterprise. The Motley Fool has a disclosure policy.

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