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The share price of one of my top-performing S&P 500 stocks took a shocking dive yesterday (19 February).
Axon Enterprise (NASDAQ: AXON), a leading developer of security products in the US, lost over 16% of its stock value in a matter of hours.
Just one day prior, on Tuesday, the shares had hit a new all-time high of around $715. But when markets opened the following morning, the price began a rapid descent to $580.
So what happened – and is this a sign to sell?
Rating downgrade
The devastating collapse seems to have been prompted by a downgrade by a key analyst at Northcoast Research. After Axon dissolved its partnership with Flock Safety, Keith Housum downgraded the stock from Buy to Neutral.
Reportedly, there are concerns that Flock may be transitioning from a partner to a competitor. This follows suggestions from Axon that Flock was imposing untenable barriers on data access.
“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,” said an Axon spokesperson.
In response, Flock Safety CEO Garrett Langley said: “Axon decided that being open and collaborative is no longer in its best interests, and no additional reason was given to us.”
While the immediate financial impact is bad enough, the potential long-term effects could be even worse. The failed partnership could boil over into Axon’s recent acquisition of Fusus, a company that potentially relies on Flock for certain data capabilities.
Recovery potential
Prior to the fall, Axon was favoured by tech enthusiasts for its impressive AI integrations and drone developments. It’s been less than a month since Goldman Sachs reiterated a Buy rating on the stock with a price target of $700. It already hit that target this week.
Even with this week’s losses, the price remains up by over 120% in the past 12 months.
In Q3 2024, revenue came in at $544m, a 32% increase year-over-year. Consequently, the security firm raised its full-year revenue guidance to approximately $2.07bn, representing over 32% annual growth.
There are now fears those targets may not be met, possibly eroding shareholder confidence.
It’s difficult to gauge the true impact of the Flock fallout. I wouldn’t imagine the dissolution of a single partnership would prompt a full-blown price trend reversal. However, if this is just the tip of a much bigger iceberg of problems, things could go south.
Sell or hold?
Considering Axon’s price-to-earnings (P/E) ratio recently crossed above 180, a correction isn’t all that surprising. A high P/E isn’t unusual for the stock (it’s been above 100 for most of the past two years) but 180 is still a lot.
When Nvidia crossed above a P/E of 200 back in 2023, the share price declined nearly 20% in the following month. The losses didn’t last long though — it reached new highs in the following months while its P/E ratio dropped.
But Axon isn’t Nvidia and it can’t rely solely on AI to save it. If Flock emerges as a serious competitor, it could threaten Axon’s profits and market dominance.
For now, I tentatively plan to hold my shares but I’d consider selling some if the situation deteriorates further.
