The share price of one among my top-performing S&P 500 shares took a surprising dive yesterday (19 February).

Axon Enterprise (NASDAQ: AXON), a number one developer of safety merchandise within the US, misplaced over 16% of its inventory worth in a matter of hours.

Simply in the future prior, on Tuesday, the shares had hit a brand new all-time excessive of round $715. However when markets opened the next morning, the price started a speedy descent to $580.

So what occurred – and is that this an indication to promote?

Score downgrade

The devastating collapse appears to have been prompted by a downgrade by a key analyst at Northcoast Analysis. After Axon dissolved its partnership with Flock Security, Keith Housum downgraded the inventory from Purchase to Impartial. 

Reportedly, there are issues that Flock could also be transitioning from a companion to a competitor. This follows solutions from Axon that Flock was imposing untenable obstacles on knowledge entry. 

“As Flock has increasingly imposed artificial barriers on integrations and access to agency-owned data, we have made the unfortunate decision to terminate our existing partnership with Flock,” mentioned an Axon spokesperson.

In response, Flock Security CEO Garrett Langley mentioned: “Axon decided that being open and collaborative is no longer in its best interests, and no additional reason was given to us.”

Whereas the rapid monetary impression is dangerous sufficient, the potential long-term results may very well be even worse. The failed partnership may boil over into Axon’s current acquisition of Fusus, an organization that doubtlessly depends on Flock for sure knowledge capabilities.

Restoration potential

Previous to the autumn, Axon was favoured by tech fanatics for its spectacular AI integrations and drone developments. It’s been lower than a month since Goldman Sachs reiterated a Purchase score on the inventory with a price goal of $700. It already hit that concentrate on this week.

Even with this week’s losses, the price stays up by over 120% prior to now 12 months.

In Q3 2024, income got here in at $544m, a 32% improve year-over-year. Consequently, the safety agency raised its full-year income steering to roughly $2.07bn, representing over 32% annual progress. 

There at the moment are fears these targets will not be met, probably eroding shareholder confidence.

It’s troublesome to gauge the true impression of the Flock fallout. I wouldn’t think about the dissolution of a single partnership would immediate a full-blown price development reversal. Nonetheless, if that is simply the tip of a a lot greater iceberg of issues, issues may go south.

Promote or maintain?

Contemplating Axon’s price-to-earnings (P/E) ratio lately crossed above 180, a correction isn’t all that stunning. A excessive P/E isn’t uncommon for the inventory (it’s been above 100 for a lot of the previous two years) however 180 remains to be rather a lot.

When Nvidia crossed above a P/E of 200 again in 2023, the share price declined practically 20% within the following month. The losses didn’t final lengthy although — it reached new highs within the following months whereas its P/E ratio dropped.

However Axon isn’t Nvidia and it will possibly’t rely solely on AI to put it aside. If Flock emerges as a critical competitor, it may threaten Axon’s earnings and market dominance.

For now, I tentatively plan to carry my shares however I’d think about promoting some if the scenario deteriorates additional.