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Massive Value Creation Comes from Massive Disruption

by Andrea James, Axon VP of Investor Relations

Published on

If you spend enough time in tech and finance circles, you'll notice that talk of disruptive technology comes up a lot. It's a sexy concept, though not well-defined and often only recognized in hindsight.

For the past 15 years, I worked as a financial journalist in media and then as a disruptive technologies stock analyst on Wall Street. I spent a lot of time studying corporations, massaging data points, working to predict future outcomes and analyzing whether new technologies could create new markets or disrupt incumbents.

Everyone wants to recognize the next hot thing before it's obvious. At Axon, we are betting that innovation can help reduce some of society's tensions around law enforcement and social conflict, and that's one of the next hot things.

With truly disruptive technologies, three patterns crop up repeatedly:

  1. The presence of the technology means you have to have it.
  2. The technology changes human behavioral patterns.
  3. The companies delivering the technology generate massive amounts of market value.

First, you know you're looking at a disruptive technology if the very existence of it means that you have to have it. Even better if the technology was largely scoffed at, at first, or was pushed forth from an entrepreneur who was regarded as eccentric before being realized as brilliant. Maybe both labels still fit the entrepreneur, but he or she eventually receives more speaking engagements than slammed doors.

Disruptive technologies create new markets. They generate products that set a higher standard for basic functioning. Whereas prior to the emergence of the disruptive technology, no one knew they needed it, after the technology bursts into the market, nobody can live without it.

Second, disruptive technologies change human behavior. Examples include the automobile, which changed the layout of cities, the clothes washing machine, which made modern life possible because laundering clothes by hand is tedious and takes hours, global navigation satellite systems, a defense application that has wide commercial utility, the smartphone, which everyone can't stop staring at, mass energy storage, which is just getting started in how it disrupts and improves our lives, and the TASER conducted electrical weapon.

Um, whoa. Yeah, that TASER. How can a police weapon be in the same disruptive category as the smartphone and the clothes washing machine?

“Before I started the company, I thought that it was crazy that if we need to stop someone, we fire a metal ball at them."

The TASER weapon, which differs from a simple stun gun because it can be fired from a distance, is based on the market disruptive concept of neuromuscular incapacitation. The very existence of the TASER weapon has changed policing, both for police officers and for the communities they serve. The existence of the product means that you should have it, because it saves lives.

“Before I started the company, I thought that it was crazy that if we need to stop someone, we fire a metal ball at them,” says Rick Smith, the founder and CEO of Axon. “That's not just a societal problem — that's a technology problem.”

That sort of thinking — that technology can solve problems in novel ways — leads to the third point, which is that disruptive technologies generate enormous market value along the way.

From the closing price on the first trading day of 2002 until the end of the first trading day of 2018, the S&P 500 and Dow Jones Industrial Average both grew at about a 5% compound annual growth rate. Meaning, if you put $1 into the S&P 500 index on January 2, 2002 and sold it on January 2, 2018, you'd have $2.29, which represents about 5% growth per year, compounded.

In that same period of time, Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) grew at 31% and 32% respectively. This means that if you invested $1 in Apple in early 2002, and did nothing else, you would have rung in this previous new year with $98. With Amazon, that same dollar becomes $112.

Such massive growth is not a technology company phenomenon — it's a disruptive tech phenomenon. Microsoft (NASDAQ:MSFT) shows a CAGR of 6% in the same period of time, which means a $1 of Microsoft in early 2002 would be worth just $2.70 in January 2018.

What's the difference between Microsoft and Amazon or Apple during that 17-year time period? You could argue that by 2002, most of the major disruptions delivered by Microsoft were behind it, whereas the smartphone and the e-commerce booms were still to come.

“For most organizations, value-creating growth is the strategic challenge, and to succeed, companies must be good at developing new, potentially disruptive businesses,” says Alfred Rappaport in the Harvard Business Review. “Here’s why. The bulk of the typical company’s share price reflects expectations for the growth of current businesses. If companies meet those expectations, shareholders will earn only a normal return. But to deliver superior long-term returns—that is, to grow the share price faster than competitors’ share prices—management must either repeatedly exceed market expectations for its current businesses or develop new value-creating businesses.”

AAXN shares, which were formerly known as TASR shares, have grown at a 20% compound annual growth rate from 2002 to early 2018, beating both the Dow Jones Industrial Average and the S&P 500 index. Axon's high growth rate was due to the disruptive success of the TASER weapon.

The TASER has been very successful as a tool and concept — but the company behind it still has room to grow. The company formerly known as TASER is now called Axon, a name change that was inspired by an expanded mission to 1) reduce social conflict, 2) obsolete the bullet, and 3) accelerate truth and justice.

I often joke that on Wall Street, money fixes everything and in Silicon Valley, technology fixes everything. Although absolutist statements are rarely true, there is truth and hope in the belief that things can be improved and that both money and technology can help.

Axon continues to disrupt the multi-billion dollar policing technology market. We are the market leading provider of on-officer body camera and evidence storage and management software. The presence of a camera in police-community interactions is highly disruptive to the policing interaction itself. Axon did not invent that dynamic — the smartphone did. Mobile phone cameras introduced an outside eye into policing, whether officers want them there or not. The on-officer camera simply rounds out the points of view and ensures that there are cameras in situations where mobile phone footage is not trustworthy or is lacking.

In domestic violence cases, for example, on-officer body cameras are increasingly used to capture the victim's “excited utterances,” which are the statements made in the heat of the moment that are often useful in prosecuting domestic violence crimes. Such footage can be more reliable or compelling for a jury than an officer's written report.

Body cameras solve a transparency problem but simultaneously generate a big data storage and management problem. Axon is solving those big data problems and leveraging the solutions to make policing more efficient and effective. We hope to change human behavior, yet again, and create value along the way.

Officers spend up to two-thirds of their time on paperwork, scribbling notes into tiny notebooks, entering data into siloed and outdated computer systems, and keying in reports. Technology could and should automate these tasks so that officers can spend more time out on the beat, building relationships with the community and doing the tough but important work of policing. The body cameras are here to stay — we believe the cameras should work smarter.

Disruptive technology generates value in the marketplace because it supports highly defensible revenue growth. Revenue growth signifies growing market adoption of any product — the willingness to pay for a product of any kind comes from the fact that the product generates value for the buyer. And the defensibility of a product is tied to technological innovation, producing a superior product, and therefore, maintaining the pricing power needed to generate profitability.