Self defense company AXON (NASDAQ: AXON) missed Wall Street’s revenue expectations in Q3 2026, but sales rose 27.8% year on year to $908.6 million. Next quarter’s revenue guidance of $1 billion underwhelmed, coming in 6.8% below analysts’ estimates. Its non-GAAP profit of $1.72 per share was 9% below analysts’ consensus estimates.

Is now the time to buy AXON? Find out in our full research report (it’s free for active Edge members).

StockStory’s take

Axon’s third quarter results drew a negative market reaction, as revenue and non-GAAP earnings per share came in below Wall Street’s expectations. Management pointed to robust growth in software and services, particularly from its digital evidence and AI-powered solutions, as a core driver of the quarter. CEO Rick Smith highlighted the company’s expanded investment in drone technology and the ongoing strength of its correctional and international markets. Chief Financial Officer Brittany Bagley noted that delays in several large federal counter-drone deployments affected reported results, explaining, “As these deals get larger, particularly with federal and international customers, the timing of individual projects can move results from quarter to quarter.”

Looking ahead, Axon’s guidance reflects both optimism around the adoption of new technologies and caution due to project timing uncertainties. Management sees opportunity in the upcoming launch of Axon Body 5 and an ongoing upgrade cycle in personal sensors, while also planning for continued elevated memory costs that will weigh on margins into 2027 and 2028. Smith emphasized the strategic rationale behind the $1.2 billion Skydio drone partnership, calling it “a foundational technology that will drive the next decade.” However, Bagley warned that the company’s approach to guidance has become more conservative, stating that large hardware-heavy federal deals will be included in forecasts only when shipment timing is certain.

Key insights from management’s remarks

Management attributed the latest quarter’s performance to software and services strength, significant investment in drone technologies, and the shifting timing of large federal contracts, especially in counter-drone solutions.

• Skydio partnership and investment: Axon committed $1.2 billion to expand its partnership with Skydio, becoming the exclusive public safety distributor in the U.S. and Canada and taking a 37% ownership stake. Management expects this move to secure access to advanced drone technology while allowing Skydio to focus on scaling its supply chain independent of overseas dependencies.
• Federal contract timing challenges: Several large federal Dedrone counter-drone deals, anticipated for the quarter, were delayed due to procurement cycles, election-related uncertainty, and logistical complexities involving hardware integration. Management explained these deals could move revenue by hundreds of basis points between quarters, introducing new variability in reported results.
• Surge in software and AI adoption: Software and services revenue grew rapidly, with real-time operations, AI, Dedrone software, and 911 offerings collectively reaching a $500 million annual run rate. Annual recurring revenue increased 40% to $1.8 billion, and net revenue retention remained high at 126%.
• Product launches and refresh cycles: The launch of Axon Body 5 with AI-powered capabilities and dual cameras was highlighted as a catalyst for a new upgrade cycle. TASER Ion also launched, aiming to expand the addressable market for less-lethal defense tools, including international and specialized users.
• Inventory strategy for supply chain risk: Axon increased inventory investment by over $100 million in Q3, aiming to mitigate potential supply disruptions, particularly for components like batteries and chips. Management stressed that this approach would ensure product availability for mission-critical customers, with inventory levels expected to normalize by early 2027.

Drivers of future performance

Axon’s outlook is shaped by continued expansion in software and AI-powered solutions, new product rollouts, and the timing of large federal hardware contracts, all set against the backdrop of ongoing cost pressures.

• Timing of federal and international deals: Management’s guidance assumes conservative recognition of revenue from large Dedrone deployments, given uncertainty around federal procurement cycles and external factors like election timing. These deals, if closed, could provide upside.
• Software and AI business momentum: Continued growth in digital evidence management, 911 systems, and AI-powered applications is expected to drive recurring revenue and margin expansion, offsetting some hardware margin headwinds. The upcoming Axon Body 5 launch is anticipated to trigger a major upgrade cycle.
• Component cost and inventory risks: Elevated memory costs are projected to persist through 2028, pressuring gross margins. Axon’s inventory buildup is meant to safeguard against supply chain disruptions, particularly for critical hardware components, but will temporarily weigh on free cash flow until inventory levels normalize.

Catalysts in upcoming quarters

In the coming quarters, the StockStory team will be watching (1) the timing and completion of large federal and international Dedrone deployments, (2) the adoption rate and upgrade momentum for Axon Body 5 and AI-enabled products, and (3) the impact of ongoing memory costs on gross margins. We will also monitor how quickly Axon can normalize its elevated inventory investment and return to targeted free cash flow conversion.

Axon currently trades at $355.61, down from $374.27 just before the earnings. In the wake of this quarter, is it a buy or sell? Find out in our full research report (it’s free).

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