Why Axon Enterprise Stock Was Crushed This Week

Shares of Axon Enterprise (NASDAQ: AXON) had plunged over 23% this week as of Thursday afternoon after multiple analysts downgraded the stock, largely due to concerns about its valuation and the falling-out with a partner in the space.

A partnership gone awry

Axon provides products and services to local law enforcement and the federal government. Northcoast Research analyst Keith Housum downgraded the company from a buy rating to neutral due to tension with a key partner, an elevated valuation, and a potential slowdown caused by federal spending cuts.

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On Jan. 31, one of Axon's partners, Flock Safety, published a blog saying Axon had ended its partnership with the company and had not been returning management's calls. It worked with Flock Safety, which leverages artificial intelligence to help police departments identify and grab license plate data.

Axon's management responded, saying Flock made customers pay higher fees to use Axon's technology and alleged other competitive behavior detrimental to its business.

Housum says he is concerned that Flock will become a "partner turned competitor." Besides the stock's valuation, he also cited the possibility that guidance for 2025 will disappoint. Axon's stock has been a big winner even after this week's strong sell-off. It has nearly doubled over the last year and is up over 500% in the last five years.

Craig-Hallum analyst Jeremy Hamblin downgraded Axon from a buy rating to hold, with a $625 price target. Hamblin is still bullish on the company in the long term but thinks the valuation needs to play catch-up after such a strong rally. The stock trades at 94 times forward earnings.

Let the situation cool off

The Pentagon recently proposed $50 billion in spending cuts, and it's unclear if that will affect the company. Furthermore, only time will tell whether Flock Safety becomes a concern as a competitor.

While Axon Enterprise has done well and still looks to have a bright future, investors may want to take some chips off the table after a big run or wait until there is more information before buying in again. The company will report earnings on Feb. 25.

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Bram Berkowitz 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.