Apple has the kind of brand authority most companies will never match, and it’s used that competitive advantage to build a very large one sticky business. In particular, by combining first-party hardware with software and services, Apple benefits from recurring revenue and high switching costs. That’s made it a cash-flow machine, and shareholders have returned 560% over the past decade.
block (NYSE:SQ) and AxonEnterprise (NASDAQ:AXON) aren’t quite the same as Apple, but both have earned brand recognition in their industries while fusing hardware, software, and services into a sticky business model. With that in mind, I think Block and Axon could also climb 600% (or more) over the next decade.
Here’s what you should know.
Block makes financial services easy and accessible. The Square ecosystem is a robust suite of hardware, software, and financial services that helps sellers run an omnichannel business. This includes everything from point-of-sale systems and card readers to payment processing and banking services.
On the other side of the business, Cash App allows consumers to deposit, spend, and invest money from a single platform, and Block’s lack of physical infrastructure means it can acquire customers much more efficiently than traditional banks.
More broadly, the breadth of the Square and Cash App ecosystems sets Block apart from many of its competitors, and that’s led to impressive growth. gross profit is up 50% over the past year to $4.8 billion due to increased exposure to both ecosystems. In particular, more mid-market sellers (i.e., those making over $500,000 a year) are turning to Square, and those merchants tend to use more software, meaning the relationship is tighter and more profitable for Block. On balance, the company generated $965 million in trailing-12-month free cash flow, up from a loss of $344 million in the year-ago period.
Block also integrates its Buy Now, Pay Later (BNPL) platform, Afterpay, with Square and Cash App. Sellers should benefit from increased transaction volumes as BNPL tends to increase conversion rates and basket sizes. And sellers can leverage consumer purchase data to provide targeted product recommendations through the Cash App. This could unleash natural synergies between ecosystems.
Overall, Block estimates its US addressable market at $190 billion in gross profit, with $70 billion from Cash App and $120 billion from Square. That means Block has captured less than 3% of its domestic market opportunity and the company has a growing presence in Europe, giving this stock plenty of room to outperform Apple over the past 10 years.
2. Axon Company
Axon specializes in public safety technology. The company is best known for conducted energy devices (CEDs) sold under the Taser brand name. In fact, it was formerly known as Taser International, but was renamed Axon in 2017 to reflect its growing software and sensor business. In this segment, Axon offers body cameras (and other sensors) that stream geolocation and video data to Axon Cloud, a software suite for digital evidence management, reporting, and real-time operations.
Collectively, these products help public safety officers (think police officers, first responders, and federal agents) work more efficiently and productively while bringing transparency to law enforcement. Building on its early success with tasers, Axon has also established itself as a leading provider of body cameras and digital evidence software. This has led to steady and steady growth.
Revenue rose 27% last year to $925 million, and the company generated $51 million in free cash flow, up from $5 million a year earlier. But Axon has barely scratched the surface of its addressable market, especially when it comes to software and sensors.
Last quarter, management said 25 agencies are now live on Axon Records, software that speeds incident reporting by replacing written words with video evidence and automating tasks like transcription artificial intelligence. For comparison, Axon has client relationships with 17,000 of the 18,000 US law enforcement agencies, meaning there’s a tremendous opportunity to resell existing clients.
Overall, Axon estimates its market opportunity at $52 billion, about 80% of which comes from tasers (for civilians and law enforcement officers), body cameras, and digital evidence software. As a leader in all three categories, Axon is well positioned to create wealth for shareholders, and here’s why growth stock is worth buying today.
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Trevor Jennewine has positions in Axon Enterprise and Block, Inc. The Motley Fool has positions in and recommends Apple, Axon Enterprise, and Block, Inc. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple . The Motley Fool has one confidentiality policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.