Shares of TASER International Inc. (NASDAQ:TASR) are trading higher by more than 7% since Friday after reports spread that the London Metropolitan Police would be purchasing up to 30,000 police body cameras.
In the wake of recent police shootings across the U.S. and constant calls of police officers using excessive force, there has been an increasing push for officers of the law to wear video cameras in an attempt to help protect both the public and the officers when they are involved in an incident.
But, from an investing standpoint, the biggest issue is that we are too early in the process to accurately determine which company or companies will end victorious in the battle of winning the contracts to supply the cameras and accompanying services.
As I mentioned, Taser stock was up more than 7% on news of a big sale. In the past six months alone, shares of TASR have doubled. Each time a news story breaks of another police shooting, investors flock to the stock with the assumptions these horrible events will ultimately help make a case for all law enforcement to wear cameras.
The most recent shooting to make the news is the South Carolina police shooting. And while pressure is mounting for police body cameras, that doesn’t mean TASER will be a winner in this situation.
Good News and Bad News for TASR Stock
Taser does have the first mover advantage on its side, and the fact that TASR is already known to law enforcement because of its more commonly known product, the actual Taser or stun gun. But, Digital Ally Inc. (NASDAQ:DGLY) is also operating in the same arena, as well as the household name GoPro, Inc. (NASDAQ:GPRO).
While GoPro is the largest company, with a market cap of $5.75 billion, it hasn’t really made headway into the world of law enforcement. But that’s not to say the company hasn’t seen the potential and won’t begin focusing on market share.
As for DGLY, the company is much smaller than the other two — a mere $50 million market cap — and currently shows negative earnings. Due to its size and lack of earnings, investors should stay out of DGLY at this time, but it may be worth keeping it on your watch list.
That brings us back to TASER and whether or not it makes a good investment. In general, TASER looks great. The balance sheet is strong with only $56 million in debt and more than $80 million in cash. TASR has healthy free-cash flow and margins for a company with $164 million in annual revenue.
But the valuation on TASR stock right now is absurd. Shares are currently trading at 9 times sales, 81 times earnings, and each time a new police shooting pops up or Taser sells a few cameras, the stock jumps higher.
TASR stock is trading on the prospect of its AXON police body camera becoming the next big thing — and it might. But, the market for policy body cameras is rather small when compared to the general public market, which is what GoPro is going after. Furthermore, the market is limited for police body cameras, so maintaining a high level of sales growth will be very difficult for Taser.
One way to help that is through Taser’s Evidence.com product which uses secure cloud storage to download and save the video footage. Evidence.com is an add-on product law enforcement can subscribe to. However, the cloud storage market is massive, and entrenched competitors are going to have an advantage over TASR.
Lastly, at the end of 2014 Taser only derived 11.5% of its sales from the camera products and services. While this means TASR stock can survive if their cameras don’t catch on, it also means the recent move of more than 100% in the past six months is likely way overblown as the camera sales will have to dramatically increase before they make a meaningful impact on the company’s sales and earnings.
Bottom Line: On the surface, TASR stock looks like a winner, but due to the valuation the stock is currently trading at, investors need to be careful when or if they buy.
As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities. Follow him on Twitter at @mthalman5513.