Jason Moser (3:11)

Yeah, I think you hit on a lot of the great points there just in regard to the growth. It's just been a very consistent grower, and that's for a lot of reasons. But I thought there were some interesting points to take away from the shareholder letter. They reached a number of milestones this year. This was their 12th consecutive quarter of 25% or better revenue growth. They broke through the $2 billion in annual revenue barrier. That's really encouraging. Again, one of the things we love about Axon, there's some certainty there, some reliability in the business model. Annual recurring revenue grew 37% now to $1 billion. I think those were the numbers that really stood out to me, along with the fact that their net revenue retention rate of 123%. That's just consistently a very good number for them. They always report really consistently well on that. I think that's just indicative of the fact that they're able to not only bring new customers into the fold, but then they do a very good job of growing the relationship with those customers.

Mary Long (4:15)

Let's dive into that net revenue retention rate a bit, because at 123%, what that effectively means is that the typical Axon customer is spending 23% more with the company now than they were a year ago. So how is Axon growing that relationship with its existing customers? What exactly is it that those existing customers are spending more on?

Jason Moser (4:36)

Well, I've always said I think that Axon, to me, it's kind of like the Apple of public safety. And I mean that in every good sense. They do a very good job of building great hardware and then iterating on that hardware, bringing out new versions of that hardware, and then selling the software and the services that come with managing that hardware and all the data that flows through that stuff. When you talk about it, what are these customers spending more money on? Well, some of these numbers are pretty impressive. Over the course of 2024, they shipped more than 200,000 Taser devices. They shipped more than 300,000 body cameras along with over 900 million cartridges. Those cartridges are what go to those Taser devices. It's A nice little, little razor and blade model there that we like so much. Then with the other side of the business beyond the hardware, Axon cloud and services revenue was up 44% to $806 million. They continue to invest in the AI opportunity. I think this is going to be a big part of this company in the coming years. They have this AI Era plan that ultimately gives their customers access to all of their current AI developments, along with the future AI developments that they haven't even yet come up with. But that was, I think, a really encouraging part of the report there. They were able to close their first 10 AI era plan deals in the fourth quarter of the year. Ultimately, that's just another way that they are able to bring customers into the fold and then keep them by continuing to develop new services and additional sorts of insights and benefits from being a part of that Axon family.

Mary Long (6:24)

That AI Era plan is interesting to me. In the call, Axon outlined five big innovative leaps that they took in 2024, the first of which was artificial intelligence in policing. I understand the use of virtual reality in law enforcement training, but artificial intelligence in policing itself kind of sounds like something different to me. So Axon calls this AI Driven public safety. What does that exactly look like and how does that roll up into this AI era plan that they've outlined?

Jason Moser (6:56)

Yeah, well, I think that'll be something that we continue to watch develop over the coming years. But again, it kind of go back to this idea of Axon being two businesses, right? The hardware, along with all of the software and services that they provide their customers in order to take advantage of that hardware. And so, I mean, while, yes, a lot of this is based on this AI era plan. In specific, with the AI Era plan, there's this draft one service, for example, which is like a transcription service, for lack of a better term, for officers who need to take the audio and video content that they generate from whatever situations in which they're placed, and ultimately produce police reports. For something like a police report, where it would be a three to four hour ordeal putting all of this information together, making sure it was correct, this Draft one service is a great way to be able to take all of that data, produce a police report in just a fraction of the amount of time the anecdotal evidence is there. Their customers love it. It's saving them hours upon hours of time. Then furthermore, this is something that's being received very well in the actual court system. You go beyond just what their customers, the police officers or public safety officers, may Feel the prosecutors, the litigators in the courtroom are looking at this stuff saying, you know what, this actually works really well. I mean, I think one of the biggest questions in regard to AI today, given that it's such a young sort of, we're in such an early stage of development in this technology, is the reliability. And so when you see prosecutors and litigators getting into there in the courtroom saying, you know what, these police reports are reliable, they work with this draft one product, I think that's super encouraging. Then the other part of Axon, really, it's all of these cameras and sensors. They're connecting all of this stuff together and learning how to do more with the data. Those AI investments are really paying off there. Finally, I think the acquisition of Fusis. They acquired this company, Fusis, back in the early part of 2024. Ultimately, this is just a deployable and automated real time crime center platform. That's something that again is taking advantage of all of these connected devices, making sense of the data and being able to provide real time and actionable insights in a very quick fashion. To me, that just really speaks volumes to the investments that they're making in all of these artificial intelligence concepts.

Mary Long (9:30)

There are a lot of high hopes baked into Exxon's current stock price and perhaps with good reason. But this is a company that's currently trading at 19%, 90 times forward earnings. No matter how you slice it or no matter what metric you look at, you're paying a premium for this company at the moment. How do you figure out what a fair price is for Axon at the moment?

Jason Moser (9:50)

I think that's a very fair statement that you made there. It does feel like you're always paying a little bit of a premium for a business like this, but that's for good reason. I think part of that is because of the market opportunity that we continue to see here. A company that just crossed over $2 billion, now they're seeing somewhere in their neighborhood of a market opportunity of $130 billion. That's not to say they're going to capture all that market. But even just capturing a fraction of that really speaks to the growth potential for a business like this. We go back to those things, like the recurring revenue, these installed bases, the hardware that they get out there and that they continue to iterate on. It's funny, look at the Taser, for example. It reminds me again, I go back to Apple. You think about Apple, iPhone 1, 2, 3, 4 and on Taser is following that same path there. I think they're on Taser 10 now. But it's not just Taser, it's body cameras and all this other stuff. To me, it makes a lot of sense that the business generates this valuation. I think one of the biggest risks with a company like Axon is valuation. We saw that it really started taking off here. And then over the last couple of weeks we saw a really big pullback based on a headline there. And that's understandable, I think, with Axon. To me, it always struck me, and as a shareholder, this is the way I view it. Personally, I think it's a great company to focus on buying a little bit here and there when the opportunities present themselves. Building a position in a company like this over the course of time seems like the most prudent strategy to mitigate that valuation risk that I think it's going to exist with this company for, for many years to come.

Mary Long (11:31)

Let's, let's before we move on to the next topic, let's hit on that really big pullback that you just mentioned and the headline that you hinted at. Despite dropping earnings yesterday, Exxon was in the news last week for dropping they dropped nearly 30% within three trading days. The reason behind this largely attributed to the fact that Exxon cut ties with their former partner, Flock Safety. Flock Safety is an automated license plate reader, and Wall street analysts started downgrading the stock as a result of the severing of this relationship. Kind of the thinking being that Flock Safety might go on to be a competitor of Axon's. What was the nature of Flock's earlier relationship with Axon? How integral were they to the Axon value proposition, and how has that relationship changed and how do you think that it will impact the company moving forward?

Jason Moser (12:18)

Yeah, I think this is a great example of sort of understanding the difference between the headlines versus reality. Now, this is something I asked Josh in our conversation and it's also something that he addressed on the earnings call as well. This headline came out recently about the relationship with Flox Safety. Now, Flock Safety being that tech startup in the automated license plate reader technology, they've been partners since April 2020. They've worked very well together, and it's something that has worked out very well for both parties involved. My question ultimately was, is this a sign that Axon is pivoting and going another way where they want to try to grow their own solutions here, or is it something where the companies still want to work together, but they just need to ultimately negotiate better terms? It sounds like this is the latter. It sounds like this is something where the two companies still want to work together, but they really need to come to better terms that work out perhaps better for both parties. That's negotiation 101. Everybody's going to have their own perspective on that. I would not be surprised at some point here in the near future if we saw a headline that said that Axon and Flock Safety are working together again and have renegotiated their relationship there. But time will tell there. I think regardless if the worst case scenario occurred where the two just parted ways and would never work again, I think that's probably at. I think it's a net loss for Flock as opposed to Axon. I think Axon really has a lot of resources at their disposal to be able to build this kind of technology and do what they want to do. My suspicion is we will see this relationship continue. It does feel like it's a little bit of a negotiating tactic.

Mary Long (14:12)

We're going to move on to a little bit of a retail roundup to close us out for the day. We also got earnings this morning from TJX, that's the parent company behind TJ Maxx, Marshalls HomeGoods and more. That company saw four quarter sales of $16.35 billion come in just below that of a year ago. Also saw fourth quarter profit stay flat with the year before. Management expects comparable sales for the year ahead to rise ever so slightly. All this might sound lukewarm, but Wall street is relatively pleased with the news. The stock was up slightly like about 3% this morning. We're not really expecting gangbusters growth in traditional retail companies, jmo. But if that's the case, what does success look like in this brick and mortar retail business?

Jason Moser (14:57)

Yeah, I think these results were okay. It didn't light the world on fire, but given the retail environment today, it's more or less I think what we expected. I think with a company like tjx, this is a business that focuses very much on the value side of things for consumer. You look at the brands behind the company, it's TJ Maxx Marshalls Home Goods for them. I think that the success really is clearly one growing. That top line revenue has grown a little bit better than 6% annualized over the last five years, which I think is encouraging, particularly given their value focus. More importantly, you look at a business like this, net income is up better than 8% over that same course of time. They generated a bit better than $4 billion in free cash flow just over the last year. There's a lot to be said for focusing on that value consumer and having that broad array of different store concepts really, I think, plays into their advantage and they really start to exploit that advantage of scale.

Mary Long (16:01)

Another element of this retail angle is that it's Party Cities. Last week in business, this is a company that was integral to at least my childhood. It's a party supply store. They went through their first bankruptcy restructuring in 2023. They were able to erase about a billion dollars of debt, but still found itself stuck with $800 million of debt. And therefore this past December, it filed for bankrupt. A few franchisees just under 30 will kind of keep the independent Party City locations operating, but for the large part, the business is closing down. This sticks out to me because Coresight Research, which publishes data on retail closures, predicts the US will see approximately 15,000 store closures in 2025. For context, in 2022. So peak pandemic, Coresight Research tracked 10,000 store closures. So they're predicting even more store closures now than we saw during the height of the pandemic. What do you think is behind this? Is this an E commerce story or is there something else eating in person retail?

Jason Moser (17:02)

I don't think it's just an E commerce story. I think that's a big part of it. And we see a lot of retail these days, particularly the bricks and mortar, where they're very focused on becoming more than just E commerce. They want to become omnichannel, being there for their consumers where and when they want or need. I think another part of this certainly is just given the nature of what something like a Party City sells. For example, this goes back to that old elementary school lesson of wants versus needs. You talk about companies like Party City, for example, that's probably more of stuff that you want but don't necessarily need. You flip that on the other side there and you look at a company like tjx where they're focusing a little bit more on things that consumers need and they're absolutely focused on offering value where that could apply. I look at this space when I think of Party City, the other company it reminds me of is the Oriental Trading Company. I don't even know if you know.

Mary Long (18:03)

That those catalogs are also an integral part of my childhood.

Jason Moser (18:09)

Oriental Trading Company filed for bankruptcy in 2010. Then Berkshire Hathaway bought them in 2012. I think that's another example where the E Commerce angle is certainly playing into their favor. But. But with Party City, I mean, they were always so reliant on those big physical footprints. And I just don't necessarily think that's the way the consumer is thinking about these days. But, but again, I mean, kind of going back to that Omnichannel idea and I think that's where a lot of retailers are focused these days. So it does seem not death by a thousand cuts, but, but definitely, definitely a few cuts there. Omnichannel, e commerce, changing consumer behavior, wants and needs. That all plays a part in it.

Mary Long (18:54)

Jason Moser, always a pleasure, always a party having you on the show. Thanks so much for being here.

Jason Moser (18:59)

Thank you.

Emily Flippen (19:04)

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Mary Long (19:29)

Selling sugar and caffeine can be a great business. My colleague Ricky Mulvey caught up with Motley fool senior analyst Emily Flippen to talk about the fast growing coffee chain Dutch Bros. Its stock is up about 160% over the past year. They break down the business model, the valuation and the chocolate covered strawberry mocha.

Emily Flippen (19:54)

Emily in preparation for this, yesterday I did go to a Dutch Bros. And it was 9:15am on a Monday. I waited in line and then I made it about one third of the way through a chocolate covered strawberry mocha to fully appreciate the experience of what they sell. I made it through about a third of that drink before I had to stop. But this is an intensely popular coffee chain that I wanted to dive into. Because you covered the company. Have you been to a Dutch Bros. What was your experience like there?

Ricky Mulvey (20:23)

Yeah, I ironically actually haven't been to a Dutch Bros. They're expanding eastward. So I'm here in Maryland, but I grew up in Texas and when I visited Texas semi recently, I planned to visit one before I realized they didn't even offer brewed coffee, which is actually the only thing I drink. So I do think calling this a coffee chain is being somewhat generous with your definition of a coffee chain. But I will just note, I mean, they do a really strong business outside of what you would imagine as your typical kind of coffee flavored beverages. They have protein shakes, they have smoothies, they have energy drinks, protein coffees. So they, they do a good job of offering, I guess, a diverse range of products here.

Emily Flippen (21:02)

So you're not lining up for the Sweet cereal sips that could be a cinnamon swirl, one that has marshmallows on the top that promises to taste just like the bottom of a sugar cereal bowl.

Ricky Mulvey (21:13)

I guess only if I'm trying to replace my lunch with it.

Emily Flippen (21:15)

Fair enough. This is what's interesting to the investors on the show and that is this is a company that is taking off in valuation and in sales. We'll compare this to Starbucks Dutch Bros. Launching a lot of new stores as they try to push eastward. And during that time the same shop sales have grown by almost 10% in company operated stores. This is at the same time where Starbucks Global in North America sales have declined. Same store sales at about 4%. So what's happening with this disconnect? Why is Dutch Bros. Taking off while Starbucks is in decline during this Brian Nicol transformation?

Ricky Mulvey (21:52)

I think there's a couple different factors at play. One element of it I do think is innovation. I think we have slightly a more innovative product line here at Dutch Bros. They've been faster to change their menu, to add new products, to take away products that aren't working to drive customers to come and transact at their locations. I think Starbucks has been arguably a little bit more stuck in their ways. They've had a harder time driving those transaction growths. I also think that Dutch Bros. Has been a little bit more approachable in a more cost conscious environment. So I do think it's that push towards innovation as well as just a tighter consumer environment which has driven that disconnect. But I will say this is a hard environment for coffee chains. It's incredibly competitive and it's not just, just Dutch Bros that's popping up around the corner. I mean we see a lot more local coffee shops as well as alternative beverage shops opening up. So I think Starbucks here just has a brand image issue that is showing in their same store sales here. Whereas Dutch Bros. Is kind of the antithesis to that. Which is to say it's cool, it's new, it's trendy and it has a brand that is rising whereas Starbucks is arguably declining.

Emily Flippen (23:02)

So I went to Dutch Bros. In the morning and then I drove past Dutch Bros. To go to Costco for a tire issue. Big story there. We'll do that another time. And it is, it is past 7pm and there is still a line at the drive thru for Dutch Bros. Maybe getting some of that menu innovation you're talking about such as the 911 which is six shots of espresso in an Irish cream breve or the Double Torture which is an extra double shot espresso, vanilla and chocolate milk. This is the innovation that people are lining up for and all of that is drive thru. This is a 90% drive through business. If you're Dutch Bros, why are you getting rid of that coffee shop experience for people to enjoy your 911 drinks or your double torture beverages?

Ricky Mulvey (23:44)

Yeah, I turn that question on its head. If you're Starbucks, why are you forcing me to walk inside of a store and stand in line just to get my coffee or just to get my beverage? I really do think the demand and the need for the third place, the thing that made Starbucks what it was 20 years ago just isn't where the market is anymore. I think there's this need for express. Right. The drive through model is kind of meeting consumers where they are today and you'll see that through the line. And sure that's not it for everybody but I do think the consumer's willingness as shown through that amazing nearly 10% company owned same stop sales growth shows that people are at this point in life more willing to sit in a line from the comfort of their car or do that mobile order pickup as opposed to physically go into a location. And in the case of something like Dutch Bros. That saves them on something like a real estate footprint because they don't need to pay, for instance store seating or a larger square footage.

Emily Flippen (24:41)

This is a stock that has exploded lately and the valuation is kind of a tricky one. Earnings have 10x over the past year as the company becomes more profitable. However, Emily, when I look at this, this is still a coffee shop where like 80 to 90% of your sales are going to go to your, your coffee beans, your rent, you got to pay. The guy who called me a good man for ordering a medium chocolate covered strawberry mocha rather than a large chocolate covered strawberry mocha. When he asked was up to for the rest of the day and I was like I just got to work. And he's like oh, if you're working you need a large, not a medium. No, I'm getting a medium anyway. That's where all the costs are going. So when you're looking at this, you're probably not looking at an exploding margin expansion story, right? Or am I wrong?

Ricky Mulvey (25:25)

Yeah, I mean clearly money well spent if you ask me. Or what, What a great employee there. But I do think you're wrong here. This is definitely a margin expansion story. Yes. To your point there are still store expansion that's necessary here, right? I mean part of the thesis here for Dutch Bros. Is Their growing store count 15% plus year as they expand eastward. You can debate whether or not that's going to be successful, but that's management's guidance here. But also margins. I mean this is a barely profitable company, right? They just got profitable over the last couple of years. Margins are still very much in the world of expanding. So if you look at where their gap net income margins are today, it's right around 2 to 3%. If you compare that to any of the other players in this space, they are a fraction at where their competitors are. So I do think there is a lot of white space for this business to expand margins. And long term I think they have a better margin margin profile than the Starbucks of the world, than the Chipotle's, even of the world because they have a smaller footprint, lower overhead costs. They're able to do more with less simply because their model is more efficient. The reason why we're not seeing that come down to earnings yet is because they are still in expansion mode, they're still in growth mode. They're doing stuff like spending money on marketing costs, spending money on Capex. All of those things are still coming down right now which is why you're not seeing that flow through the bottom line. So I think something like price to earnings is definitely the wrong way to be evaluating this company for where they are today.

Emily Flippen (26:46)

We'll talk about that in a sec because 221 times earnings is a eye popping multiple. But one thing I want to focus on before we get there is the stock issuance because Dutch Bros. Does like to issue stock. They say they're not going to do it but then you know you got general corporate purposes going on so you maybe you got to issue some stock. Is dilution a concern for long term investors here?

Ricky Mulvey (27:08)

I would say yes and no. So this has been a historically pretty dilutive business again for where they are in the life cycle of this business though this is still very much growth company. We see this in a way that they're funding their capital expenditures. So you have a couple of different options for how you're going to raise money. This is a company that has chosen to do that via public markets and part of that is coming from their private equity sponsors. So same company, same private equity sponsors that say took Planet Fitness public. This is same thing that they're doing here at Dutch Bro. So some of this is selling out the private equity sponsors. That's contributing a bit to that dilution. So I'm not overly concerned about it. But I will say this about the dilution in general, this is company that as they seek to expand their store count, right, getting from that around a thousand stores today to upwards of 4,000 stores over the course of the next decade. So massive expansion plans that is incredibly, incredibly capital intensive. They want to do that mainly through company owned stores. They have some franchise owned stores, but they want to do that mainly through their own company owned stores. That requires a lot of upfront capital. Now management has said that they have raised the capital they need and will be self funding from this point forward. So they believe that they're not going to be dilutive from this point forward. I'm a little bit more doubtful. I built my model for this company at the, you know, midpoint end of last year. And in order to meet a lot of these growth targets, I expect that they're probably going to need to raise capital. I would expect that they probably do that via debt at some point as opposed to issuing more shares. I, I'm not management though, so what do I know? So I'm a little bit doubtful of that. But if you're taking management at their word here, they expect that dilution will slow down. But to your point, I mean this is a company that is still growing, still just becoming profitable. But if they're able to do that and be self funding then that dilution should slow down or stop altogether.

Emily Flippen (28:58)

So you don't want to use price to earnings companies at over 200 times earnings. All right, what, what multiples do you want to use here to talk about this company's valuation?

Ricky Mulvey (29:06)

I mean it's not that price to earnings is the wrong way to think about it. Right. When you think about a business long term, you're always evaluating, okay, where do I think it's going to be five, even 10 years from now in terms of cash generation Earnings is one way to evaluate element of cash for that company. Right? Oper margins. I just don't think where they are today in terms of their current earnings potential is representative of their long term earning potential. I do not think this company is going to be producing 2% net income margins into perpetuity. I think that's probably going to be closer to 15% net income margins into perpetuity. So really what I'm looking for here is how rapidly can they expand and how can they sustain that store count. So as they expand eastwards, how do they handle competition? They have some pretty stiff competition eastward. Not only does real estate get more expensive, but they're competing with a bunch of pre existing coffee Chains Northeastern are very particular with their coffee. So let's see how they do there. If they're able to achieve double digit store expansion, this 4,000 store count, that's kind of what I'm looking for here. How are they able to do in terms of same store sales growth? We mentioned at the top that they have nearly 10% same store sales growth for company owned stores. However, management has consistently guided for low to mid single digit same store sales growth. That to me says, okay, maybe there's an element of fattiness here. Are they cannibalizing their existing stores right now? Their expansion plans are kind of through this fortressing strategy long term, two years from now, three years from now, did they overbuild their stores? Do they have to start closing down stores that are underperforming in that case, that's showing to me that this is a fattiness. Right. They're not actually able to compete in the areas that they're rapidly expanding into. So those are sort of the things that I'm using to judge long term performance. Not saying, okay, well we're earnings right now, right? That's not the valuation story for this company long term. The actual story is what does a long term margin profile look like? What does long term growth story look like? And there are a lot more factors that go into that beyond just the 2% earnings margin that we see today.

Emily Flippen (31:05)

So I did a valuation that you did, a really nice one that was very thoughtful and detailed. Mine for those listening was the equivalent of playing like tic tac toe on the back of a napkin. I got one where, okay, so let's say Dutch Bros. Quadruples revenue, quadruple store count, quadruples revenue and gets a more mature Starbucks type earnings multiple. Right now this stock would be considered cheaper, cheap. But let's say Dutch Bros. It doesn't quite go as they expect. They double their revenue, they keep issuing some stock and you still have a 50x earnings multiple, which is a little growthy, especially compared to Starbucks. If that happens, investors are even. So as you're watching this company's growth story moving forward, what are the scenarios you're thinking about? Is it these, is it something else?

Ricky Mulvey (31:49)

Yeah, something else entirely. Because when somebody is slapping an earnings multiple onto a company, what you're implicitly doing is taking in the market market's assumption for something like operating margin. What is your operating margin assumption in that case?

Emily Flippen (32:01)

I did about 10%. We matured out at about 10%.

Ricky Mulvey (32:06)

So that's the sort of assumption that I think is critical when judging this type of company's success. And there's two different ways that this company goes about building out their store location. There's a ground leasing model, right. And that ends up being slightly more capital intensive in the long term versus in the near term. And there's lots of different ways that you can go about building out 3,000 plus locations that can end up having an impact on what the long term margin profile for this company looks like. And so I always hesitate against making kind of broad reaching assumptions about something like an earnings multiple because the implicit assumptions that go into that can kind of end up making errant assumptions about the valuation of a company. So in my case, what I'm looking for, and again this is a lot easier to make the math work for a business like Dutch Bros. When I did this math again earlier last year versus today. So I'm not trying to argue that the company is a a screaming buy today. I can still make the math work. It's a lot harder. I will argue that you need that 15% plus store count over the course of the next decade. That's a lot. That's a lot. That's one of the biggest factors here. You need same store sales growth around 5 to 6%. A lot of that is coming from pure transaction growth. So the royalty members, right. The rollout of stuff like mobile ordering need a lot of people coming back ordering more at higher prices. So same store sales growth above what management is guiding for today as well as a net income margin gap, non adjusted net income margins 15 to 20%. So I think if you can make those assumptions work, then you're looking at a market beating investment here. And that's with my discount rate of around 8 to 9%.

Emily Flippen (33:37)

Hopefully that's not two in the weeds. I really enjoyed the discussion. Emily Flippin, thanks for being here. Appreciate your time and your insight.

Ricky Mulvey (33:42)

Yeah, thanks for having me. Everyone go grab a coffee.

Mary Long (33:51)

As always, people on the program may have interest in the stocks they talk about. And the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and are not approved by advertisers. The Motley fool only picks products that it would personally recommend to friends like you. I'm Mary Long. Thanks for listening. We'll see you tomorrow.

Ricky Mulvey (34:16)

La.