Baron Capital, an investment Management Company, released its fourth quarter 2025 investor letter for its “Baron Opportunity Fund”. A copy of the letter can be downloaded here. The Fund returned 4.63% (Institutional Shares) in Q4 2025, outperforming the Russell 3000 Growth Index’s (the Benchmark) 1.14% gain and the S&P 500 Index’s 2.66% return. The Fund appreciated 19.73% for the full year, surpassing the benchmark’s 18.15% and the S&P’s 17.88% returns.  A turbulent year ended with moderate improvements in ...

Core Insights - The AI trade is well-established, with significant market value growth, particularly for companies like Nvidia, which has added approximately $4 trillion since the launch of ChatGPT [1] - Despite concerns about a potential bubble, the AI sector is still in its early stages of evolution, presenting further growth opportunities [1] Company Overview - Axon Enterprise is a leading player in law enforcement technology, known for its TASER stun guns, body cameras, and software solutions for managing evidence and investigations [3] - The company has achieved a remarkable 2,570% increase in stock price over the past decade, although it has recently seen a decline of over 40% from its peak due to market pressures [4] Financial Performance - In 2025, Axon reported a 33% revenue growth, reaching $2.8 billion, with a 39% increase in Q4 revenue to $797 million, indicating strong momentum [5] - The company achieved adjusted EBITDA of $124.5 million [5] Market Data - Axon has a current market capitalization of $43 billion, with stock prices fluctuating between $512.92 and $535.00 on the day [6][7] - The stock has a 52-week range of $396.41 to $885.91 and a gross margin of 59.65% [7] AI Innovations - In 2024, Axon launched Draft One, a generative AI tool that assists in writing police reports using camera footage, enhancing efficiency for law enforcement [7][8] - The company has also developed the Axon Assistant, a voice-activated AI that operates within body cameras, providing real-time translation and policy-related assistance [8] Growth Potential - Axon is expected to reach $8 billion in revenue by 2028, nearly tripling its current figures, which suggests significant upside potential for its stock [9]

Core Viewpoint - The software sell-off has created attractive buying opportunities, particularly in the SaaS sector, despite concerns about AI disruption affecting high-priced software stocks [1]. Group 1: Software Market Overview - The iShares Expanded Tech-Software Sector ETF (IGV) is down 24% year-to-date through February 25, indicating significant selling pressure in the software sector [1]. - Fears surrounding AI advancements have contributed to the decline in software stock valuations, leading to a perception of an AI bubble [1][2]. Group 2: Figma Analysis - Figma's stock has decreased by 74% since its public debut, reaching a low of $20 per share, which translates to a market cap of $10 billion, significantly below Adobe's acquisition offer of $20 billion in 2022 [4]. - Despite the decline, Figma has shown strong growth, with a 40% increase in revenue to $303.8 million in the fourth quarter, and a net dollar retention rate of 136% [6][9]. - Figma's AI products are gaining traction, with a 70% increase in weekly active users quarter-over-quarter, and the company is actively collaborating with AI startups [8]. Group 3: Axon Enterprise Analysis - Axon Enterprise's stock has fallen by 40%, but the company remains a leader in law enforcement technology, known for its TASER products and software solutions [10]. - The company reported a 39% increase in revenue to $797 million and a 46% rise in adjusted EBITDA to $206 million [11]. - Axon is investing heavily in AI, launching tools like Draft One for generating police reports and an automatic license plate recognition product, with a forecast of $8 billion in revenue by 2028, implying a 30% annual growth rate [14].

Core Insights - Axon Enterprise (AXON) stock surged over 20% following a strong Q4 earnings report, with a projection to more than double its revenue to $6 billion within three years [1] - The stock is currently facing a key resistance level at $539, and a decisive break above this level may lead to increased upward momentum [1] Financial Performance - In Q4, Axon reported revenue of $797 million, reflecting a significant 39% increase year-over-year [5] - The company's net revenue retention rate reached 125%, indicating that existing customers are not only remaining loyal but also increasing their spending [5] Product and Market Strategy - Axon's "AI Era Plan" has transitioned from concept to a profitable reality, with AI-driven products like Draft One becoming the fastest-growing launches in the company's history [6] - The integration of body-cam audio with automated report drafting has created a high-margin SaaS model that is difficult for competitors to penetrate [6] Analyst Outlook - RBC Capital Markets reaffirmed its "Outperform" rating for Axon following the Q4 report, citing $14.4 billion in future contracted bookings and successful expansion into international markets and the 911-dispatch sector [7] - Analysts view the recent pullback in Axon’s stock price as an attractive entry point for long-term investors, despite lowering the price target to $735, which still suggests a potential upside of about 35% [8]

Core Insights - Axon Enterprise (AXON) experienced a 16% surge in premarket trading following a strong Q4 earnings report, with revenue of $796.7 million exceeding consensus estimates by 5.4% [1] - The company's annual bookings increased by 46% to $7.4 billion, with future contracted bookings reaching $14.4 billion, indicating robust revenue visibility [1] - Management provided guidance for 2026 revenue growth of 27% to 30% and an adjusted EBITDA margin of 25.5% [1] Financial Performance - Q4 revenue was reported at $796.7 million, a 38.6% year-over-year increase, surpassing the FactSet consensus of $755.6 million [1] - Non-GAAP EPS was $2.15, compared to $2.08 in the previous year, significantly above the consensus estimate of $1.67 [1] - Adjusted EBITDA rose by 46% to $206.3 million, with a margin improvement to 25.9% [1] Future Outlook - Management's guidance for 2026 includes revenue growth of 27% to 30% and an adjusted EBITDA margin of 25.5% [1] - The long-term target for 2028 aims for approximately $6 billion in annual revenue and a 28% adjusted EBITDA margin [1] - The substantial backlog of future contracted bookings provides significant revenue visibility heading into 2026 and beyond [1] Market Reaction - The stock had previously declined by 22% year-to-date before the earnings report, making the positive response from investors notable [1] - Analyst consensus remains bullish, with 18 buy ratings and a consensus price target near $784 [1] - The premarket surge indicates that the earnings report met investor expectations, potentially leading to revisions in analyst targets [1]

Financial Data and Key Metrics Changes - In 2025, total bookings surpassed $7 billion, representing a more than 40% increase year-over-year, with fourth-quarter bookings up over 50% [10][11] - Revenue for the fourth quarter grew 39% year-over-year to $797 million, marking the eighth consecutive quarter of over 30% growth [27] - Adjusted EBITDA grew 46% year-over-year to $206 million, with an adjusted EBITDA margin of 25.9% [32] Business Line Data and Key Metrics Changes - Software and services revenue grew 40% year-over-year to $343 million, driven by expansion within existing customers and new customer growth [28] - Connected devices revenue increased 38% year-over-year to $454 million, with TASER revenue growing 32% to $264 million [30] - New product bookings, including Air, AI, and Fusus, totaled over $1 billion for the year, nearly tripling the previous year's result [13] Market Data and Key Metrics Changes - Bookings in new and emerging markets surpassed $2 billion, with international corrections and justice showing record results [17][18] - The international team achieved over $1 billion in annual bookings for the first time, indicating strong growth in global markets [18] Company Strategy and Development Direction - The company aims to become the leading global sensor network, integrating AI capabilities into its product offerings [101][102] - There is a focus on expanding into enterprise markets, with significant opportunities identified in federal law enforcement and corrections [22][24] - The strategy includes continued investment in R&D and new product development to maintain a competitive edge [54][55] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the demand environment for 2026, anticipating strong performance across all core markets [112] - The company is positioned to leverage AI advancements to enhance its product offerings and customer trust [101][103] - Management emphasized the importance of execution and maintaining momentum in a rapidly evolving market [105][106] Other Important Information - The company completed acquisitions of Prepared and Carbyne, enhancing its capabilities in the 911 and emergency response sectors [35] - Adjusted gross margin was reported at 61.1%, with expectations for continued volatility due to product mix [31] Q&A Session Summary Question: What are the expectations around bookings growth and the demand environment in 2026? - Management refrained from providing specific bookings guidance but expressed confidence in strong demand across all core markets [112][113] Question: Can you discuss the differentiation of Axon 911 and the go-to-market strategy? - The integration of Prepared and Carbyne is seen as a significant enhancement to the 911 ecosystem, providing real-time data and efficiency [117][118]

Financial Data and Key Metrics Changes - Full-year bookings for 2025 surpassed $7 billion, representing an increase of over 40% year-over-year, with Q4 bookings up more than 50% [10][11] - Revenue for Q4 grew 39% year-over-year to $797 million, marking the eighth consecutive quarter of over 30% growth [27] - Adjusted EBITDA grew 46% year-over-year to $206 million, with an adjusted EBITDA margin of 25.9% [32] Business Line Data and Key Metrics Changes - Software and services revenue grew 40% year-over-year to $343 million, driven by expansion within existing customers and growth with new customers [28] - Connected devices revenue increased 38% year-over-year to $454 million, with TASER revenue growing 32% to $264 million [30] - New product bookings, including Air, AI, and Fusus, totaled over $1 billion for the year, nearly tripling the previous year's result [13][14] Market Data and Key Metrics Changes - Bookings in new and emerging markets surpassed $2 billion, with international bookings crossing $1 billion for the first time [17][18] - The corrections team achieved the largest single customer booking in company history, showcasing strong product-market fit [19] Company Strategy and Development Direction - The company aims to be a leader in the AI-driven environment, with a focus on converting existing customers to AI users [14] - The 2028 revenue target is approximately $6 billion, with a goal of achieving a 28% adjusted EBITDA margin by then [48] - The strategy includes continued investment in R&D and a focus on integrated hardware and software solutions to address complex regulatory requirements [25][53] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the demand environment for 2026, anticipating strong performance across all core markets [110] - The company is positioned to leverage its investments in AI and new product development to drive future growth [100][102] - Management emphasized the importance of maintaining a long-term perspective and avoiding complacency in a rapidly evolving market [101] Other Important Information - The company completed the acquisition of Prepared in Q4 and Carbyne in the current month, enhancing its product offerings [35] - Adjusted gross margin was 61.1%, impacted by tariffs and product mix, but expected to improve over time [31] Q&A Session Summary Question: What are the expectations around bookings growth and the demand environment in 2026? - Management refrained from providing specific bookings guidance but expressed confidence in strong demand across all core markets [109][110] Question: Can you discuss the differentiation of Axon 911 and the go-to-market strategy? - The combination of Prepared and Carbyne is seen as a significant enhancement to the 911 ecosystem, providing an efficient overlay to existing systems [114][115]

Financial Data and Key Metrics Changes - In 2025, the company achieved full-year bookings of over $7 billion, representing a more than 40% increase from the previous year [30] - Q4 bookings increased by over 50%, marking a significant acceleration compared to the previous two years of high 20% growth [31] - Revenue for Q4 grew 39% year-over-year to $797 million, marking the eighth consecutive quarter of over 30% growth [40] - Adjusted EBITDA grew 46% year-over-year to $206 million, with an adjusted EBITDA margin of 25.9% [42] Business Line Data and Key Metrics Changes - Software and services revenue grew 40% year-over-year to $343 million, driven by expansion within existing customers and new customer growth [40] - New product bookings, including Air, AI, and Fusus, totaled over $1 billion for the year, nearly tripling the 2024 result [32] - Connected devices revenue increased by 38% year-over-year to $454 million, while TASER revenue grew 32% to $264 million [41] Market Data and Key Metrics Changes - Bookings in new and emerging markets surpassed $2 billion, with record results in international corrections and justice [34] - The international team achieved over $1 billion in annual bookings for the first time, with significant deals in Q4 [34] - The corrections team delivered the largest single customer booking in company history, showcasing product market fit across the platform [35] Company Strategy and Development Direction - The company aims to leverage its integrated hardware and software solutions to address complex regulatory and liability requirements, positioning itself well for AI adoption [38] - The focus is on expanding into new markets, including enterprise and federal law enforcement, with promising signs of growth [37] - The company is committed to maintaining a strong balance sheet and pursuing tuck-in acquisitions to enhance its ecosystem [54] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the demand environment, anticipating strong performance across all core markets in 2026 [94] - The company is focused on executing its strategy to become the leading global sensor network, emphasizing the integration of AI into its offerings [96] - Management highlighted the importance of maintaining customer trust and delivering innovative solutions to drive future growth [87] Other Important Information - The company completed the acquisition of Prepared in Q4 and Carbyne in the current month, enhancing its product offerings [45] - Adjusted gross margin was reported at 61.1%, with expectations of volatility due to product mix but long-term benefits from software growth [42] - The company targets a revenue growth range of 27%-30% year-over-year for 2026, with an adjusted EBITDA margin of 25.5% [45] Q&A Session Summary Question: What are the expectations for bookings growth and the demand environment in 2026? - Management refrained from providing specific bookings guidance but expressed confidence in strong demand across all core markets [94] Question: Can you discuss the differentiation of Axon 911 and the go-to-market strategy? - The integration of Prepared and Carbyne is expected to enhance the 911 ecosystem, providing efficient and effective solutions that outperform legacy systems [99]

Core Viewpoint - Software stocks have experienced a significant sell-off, but not all are considered good investment opportunities, with specific recommendations for buying and avoiding certain stocks [1][2]. Group 1: Axon Enterprise (Buy Recommendation) - Axon Enterprise has seen its stock decline approximately 50% from its peak six months ago and 25% from two weeks ago, making it a potential buy [4]. - The company combines hardware and software, creating a resilient ecosystem that retains customers, particularly law enforcement agencies, which are less likely to develop custom AI software [5][7]. - Axon is expected to grow rapidly, with projected revenue growth of 31% for 2025, reaching $2.74 billion, despite a high price-to-sales ratio of 14 [8]. Group 2: Atlassian (Avoid Recommendation) - Atlassian has a large customer base, including over 350,000 customers and 80% of the Fortune 500, but its stock has dropped 72% over the past year due to AI-related fears [9][10]. - The company reported a 23% revenue growth to $1.6 billion in the fiscal second quarter, but it has been GAAP unprofitable for the last 10 years, raising concerns about its long-term viability [10][14]. - Atlassian's products are seen as vulnerable to AI disruption, and the company has been heavily reliant on share-based compensation, which could dilute shareholder value [13][15].

Core Viewpoint - Axon Enterprise has demonstrated exceptional stock performance over the past decade, consistently delivering positive returns even during broader market downturns, with a significant stock price increase of 3,340% from the end of 2015 to 2024 [2][3]. Company Performance - From 2016 to 2024, Axon generated positive returns in every year, contrasting with the S&P 500, which had two losing years [2]. - In 2025, Axon experienced a 4% decline in stock price, marking its first underperformance against the S&P 500 since 2017, despite being up over 40% at one point during the year [5]. Revenue Growth - Axon has achieved robust revenue growth, with over 30% growth in the last seven quarters and in 14 of the last 15 quarters [6]. - The company raised its full-year revenue guidance for 2025 to $2.74 billion, reflecting a 31% annual growth [7]. Valuation and Market Position - The stock's growth has been constrained by a significant increase in its price-to-sales ratio, which rose from 4 a decade ago to 19 today [7]. - Despite valuation challenges, Axon is well-positioned for future growth due to strategic acquisitions and product innovations [7][8]. Strategic Acquisitions - Axon has made key acquisitions, including Prepared and Carbyne, which have expanded its total addressable market by $5 billion to $159 billion [8]. - The launch of Axon 911, utilizing AI technology for emergency response, is a significant development that enhances the company's service offerings [8]. Technological Innovations - The introduction of a generative AI product called Draft One, which automates police report writing, exemplifies Axon's commitment to leveraging technology to improve efficiency [9]. - Axon is expanding its market for body cameras, achieving its largest sale in 2024 to a package delivery company [10]. Long-term Outlook - The company is viewed as healthy and capable of returning to its previous growth trajectory, with strategic moves indicating a focus on long-term success [12][13].