Taser Shares Undervalued With Double-Digit Growth And Strong Camera Adoption

| About: TASER International, (TASR)

Summary

Shares of Taser down 26% in 2014 and down over 40% from 52-week highs.

Strong adoption of AXON cameras continues to boost backlog and recurring revenue.

International sales ready to heat up with new markets and a new office.

Taser (NASDAQ:TASR), once known for its stun guns, has transitioned its business model to capture additional growth and market share. The company's newer line of AXON cameras has been well received and adopted by many large and small cities around the country. One year ago, I recommended buying shares of Taser for its new business model. With shares now trading back at the same level, my buy recommendation is reiterated. This new business focus has provided a boost to revenue, as demonstrated by the recent second-quarter results.

Second-quarter revenue increased 15.5% to $37.2 million. This represented the 10th consecutive quarter of year-over-year double-digit revenue growth. Bookings for the quarter increased to $11.2 million. The Taser weapons business saw revenue growth of 7.9% to $32.7 million. Gross margin was 67.4%. Domestic weapons increased 9% for the quarter.

The AXON, Evidence.com, and Taser Cam segment saw quarterly sales of $4.5 million. In the second quarter, the company sold nearly four times the number of cameras than the prior 12 months.

The second quarter saw many large wins amongst police departments, including a large one with San Diego, one of the ten most populated cities in the United States. Taser said that San Diego marks the 7th of the 72 major cities in the United States to have deployment of AXON. To go along with this, three additional major cities are in paid trials and 10 more are in pilot programs or active discussions. San Diego represented $4 million in second-quarter bookings.

On Tuesday, Taser provided a new update on third-quarter orders. The new deals add more than 450 AXON cameras, including a large 194 unit order for Winston-Salem. Here is a look at the major parts of that announcement:

  • Burlington Police Department (NYSEARCA:VT): 30 AXON body cameras with five years of EVIDENCE.com, add-on order
  • Cullman County Sheriff's Office (NYSE:AL): 46 AXON body cameras with five years of EVIDENCE.com and TASER Assurance Plan
  • Flagstaff Police Department (AZ): 50 AXON flex cameras with five years of EVIDENCE.com
  • Hanford Police Department (NASDAQ:CA): 40 AXON flex cameras with five years of EVIDENCE.com
  • Madison County Sheriff's Department : 90 AXON body cameras with five years of EVIDENCE.com
  • Winston-Salem Police Department (NYSE:NC): 194 AXON flex and 99 body cameras with three years of EVIDENCE.com, add-on order

Taser lowered its price on the AXON cameras earlier this year to attract more upfront orders that could be converted into monthly subscription revenue via the Evidence.com platform. That strategy seems to be working and even led to a slight price increase on the AXON cameras. According to the company's website, the AXON Flex retails for $599, while the AXON Body retails for $399. Evidence.com is subscribed at a rate of $15 a month.

Another huge catalyst for Taser is its international growth. During the second-quarter earnings call, Taser mentioned its London Metropolitan pilot program. The company also said it is adopting video and cloud products in Brazil. The company extended its partnership with Amazon to utilize data centers in Brazil to store Evidence.com files. Taser opened its new international office in Amsterdam back in May. This office will be responsible for all international sales and supports more than 100 countries.

The second quarter saw international sales decline slightly. This will likely not be the case going forward, as many countries work on new laws that will benefit Taser. New approval rules in Canada led to the country's first smart weapon sales from Taser in the second quarter. In 2013, international sales made up 16% of total sales with revenue of $22.2 million.

The pilot program with the London Metropolitan police is a possible catalyst for Taser that will be played out over the next year. The deal is good for 500 AXON body cameras on a one-year pilot program. The cameras are being used by nine different London boroughs and also includes the Evidence.com platform. If Taser can turn this pilot into a full service it would be a huge camera deal and also a large recurring revenue stream from Evidence.com. In the United States, the company's largest market is currently Fort Worth, which recently added 400 AXON Flex to hit a total of 615 units.

Another catalyst in terms of technology and potential product offerings was the hiring of Bret Taylor to the board of directors. Taylor was the former Chief Technology Officer at Facebook and the current Chief Executive Officer of Quip. Taylor may better be known as one of the co-founders of Google Maps. Taylor also founded Friendfeed, which was later acquired by Facebook. Taylor has a grasp on the technology market and should make quick work at upgrading benefits to the Evidence.com platform.

Back in March of 2013, Taser shared many long term plans and projections for the business. Included in that was revenue and earnings per share goals for the year 2017. During the recent earnings call, Taser said it has seen sales advance rapidly since then. In fact, Taser no longer feels investors should rely on the long term projections. I believe this is because it will end up surpassing the 2017 figures earlier than anticipated. In 2017, Taser anticipated weapon sales hitting a range of $174 to $200 million and video sales hitting $51 to $103 million. Earnings were also estimated to hit a range of $0.76 to $1.10 per share.

Analysts on Yahoo Finance see revenue growing 12.1% to $154.6 million for the current fiscal year. Earnings per share are estimated to hit $0.33 for the full year. In 2015, analysts see revenue rising 14.0% to $176.1 million and earnings per share increasing to $0.44.

The risk with Taser may be its high price to sales ratio. The company trades at around four times annual sales. The company also trades at over 30 times annual earnings per share. With solid double-digit growth in revenue and increasing margins through the increased adoption of Evidence.com, the higher multiples should be overlooked. Taser also trades with a cash balance of $59.8 million and accounts receivable of $22.1 million, which should not be overlooked.

Back in August, I recommended buying shares of Taser due to its business shift. At that time, the company had signed several large orders of cameras, including 145 to Fort Worth police. The company also had issued 2017 guidance and seemed to be hitting the growth head on. Since that time, shares rallied several times, only to fall back down to the same level from that period a year ago.

Shares of Taser trade over $11. This falls towards the low end of their 52-week range ($8.57 to $20.83). In 2014, shares of Taser are now down 26%. Over the last 52 weeks, shares are up 30%. Shares now trade 41% below their 52-week high, offering a great entry point for long term investors who believe in the new business model.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in TASR over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.