Software & Services Momentum Continues, but Cost Pressures Loom

What happened

Axon's Software & Services segment grew 39.6% in FY2025, driven by an expanding user base and adoption of premium features, as highlighted in a recent Zacks article. However, the DeepValue report reveals that this growth comes with significant cost headwinds: FY2025 adjusted gross margin fell to 62.6% due to tariffs, and the company swung to a GAAP operating loss of -$62.1M. Despite strong demand signals like 125% net revenue retention and $14.4B in future contracted bookings, the report maintains a WAIT rating, citing elevated valuation (P/E 319x) and the risk that tariff-driven margin pressure or slowing NRR could derail the expansion narrative. The article's upbeat tone on software momentum contrasts with the report's caution, as the market may be overlooking the fragility of margins and the heavy stock-based compensation ($590M-$620M guided for FY2026). The key question is whether the software growth can sustain its pace while absorbing cost inflation, or if margin compression will force a reset of expectations.

Implication

Over the next 6-12 months, the software segment's trajectory is critical, but the risk is that the upbeat narrative around AI and platform expansion may be masking underlying margin erosion from tariffs and rising SBC. The DeepValue report's bear case sees NRR falling below 115% and FY2026 growth resetting to ~20%, justifying the WAIT rating. A safer entry would be near $440, where the downside from a deceleration is better priced. Until then, the stock's elevated multiples (EV/EBITDA 207x) leave no room for error, making it vulnerable to any negative surprise on tariffs or conversion of contracted backlog.

Thesis delta

No fundamental shift. The article's emphasis on software growth aligns with the report's positive indicators, but the report's critical view on margins and valuation remains unchanged. The delta is that the market may be over-rotating on the software narrative without fully pricing in the tariff and SBC overhang. The thesis stays WAIT until Q3 2026 proof points confirm NRR >120% and margin stability.