The following is an excerpt from Anthony Bozza’s Lakewood Capital Q1 letter to investors on why they are shortTASER International, Inc. (TSAR) – stay tuned for more coverage.

Also see – Bozza’s GTAT short “Bozza admitted that their experiment was “crude and unscientific,” analysts at the hedge fund simply dropped both of the phones on their faces from six feet in the air”

Over the years, we have had good results shorting stocks of questionable value that are at the center of the latest media or investor frenzy. For instance, one year ago, I wrote about our short position in a company called Plug Power, a beneficiary of the investment craze du jour at that time – fuel cells. Since then, Plug Power’s stock has returned to earth, declining by over 60%. Whether the subject of interest is clean energy, bird flu, 3D printing, Ebola or marijuana stocks, there always seems to be a headline-grabbing theme that investors feel compelled to “play” through the stock market. Recently, we have initiated a short position in Taser International, a $1.6 billion market capitalization company whose shares have doubled in recent quarters as investors look for ways to capitalize on the likelihood of increased use of police officer body cameras.

Taser International is widely known for its weapons segment, which produces stun guns that represent close to 90% of total sales. While the weapons business is effectively a monopoly, it has already reached nearly full penetration, and sales are now mostly driven by replacement demand. Last year this business had record volume with 98,000 professional units sold.

Taser International’s sales

We believe a fair portion of these sales reflects catch-up replacement demand from strained police budgets coming out of the recession. On average, Taser sold 72,000 units annually over the prior nine years. We believe the useful life of a Taser stun gun is seven to ten years, and given Taser International’s installed base of approximately 600,000 units, normalized demand is well below 100,000 units. Additionally, we believe current operating margins of 35% may be at peak levels versus a 17% average over the past five years. Taser has also touted opportunities in international markets, but our research indicates that this has been slow to materialize (despite a decade of Taser’s efforts) due to cultural differences as many international police forces do not carry weapons at all. At a generous 20x earnings, the weapons business would be worth $12 per share compared to Taser’s current price of approximately $30 per share.

Investors in Taser International’s stock have high hopes for the company’s burgeoning body camera business which allows police departments to record the activities of its police officers.

Taser International’s profit potential is questionable

While we recognize the merits of officers wearing body cameras, we believe the profit potential for Taser International is questionable. Unlike Taser’s weapons business, the body camera business has multiple well-funded competitors. Taser does not even manufacture its own hardware and sells the cameras at breakeven to negative gross margins with the hopes of making money by charging for cloud-based video storage. Many police forces already have in-house technology infrastructure to support video for their in-car video systems, and they are often nervous about storing this data off premise. Even if agencies agree to cloud storage, we are skeptical they would be willing to pay Taser very much for this given Taser in turn is merely using Amazon’s cloud service to store the data.

The body camera segment lost $19 million last year. Even presuming an aggressive market penetration rate of 70% and a 50% market share for Taser, we struggle to see how this business is worth even $4 per share. Adding this value to our estimated weapons business value, we believe Taser International’s shares have nearly 50% downside from current levels.

Lakewood Capital Short On TASER International, Inc. (TSAR)