What Makes a Technology Company Build a Moat?

A successful product can give a company a strong year. A competitive advantage can potentially give it something more valuable: the ability to remain relevant even after competitors notice the opportunity.

Investors often describe such an advantage as a “moat.” The term sounds simple, but identifying one is considerably harder than identifying a popular product. High sales, rapid growth or a recognizable brand do not automatically protect a business from competition.

Axon Enterprise provides an interesting case because its business has expanded far beyond a single category of hardware. TASER devices, body cameras, digital evidence management, cloud software and other technologies increasingly form parts of a broader public-safety ecosystem.

For investors, that raises a more useful question than whether an individual product is successful today: what would make a customer increasingly reluctant to leave tomorrow?

A Moat Can Begin After the First Sale

Consider the difference between selling a standalone device and becoming embedded in a customer's daily operations.

A police department can purchase hardware from a supplier. If the relationship ends there, another manufacturer may eventually compete for the next equipment order primarily through price, specifications or product quality.

The economics begin to change when the hardware becomes connected to software used every day.

A body camera creates digital evidence. That evidence has to be uploaded, stored, organized, retrieved and shared according to established procedures. Other tools can then become connected to the same workflow. Employees are trained to use the system, data accumulates and processes are built around it.

Replacing one device is relatively simple. Replacing an entire operational system can be much more complicated.

This is the logic behind switching costs. They do not necessarily mean that a customer is technically unable to move to a competitor. Instead, changing providers may require time, retraining, data migration, integration work and disruption to existing processes.

For an investor, those frictions matter because they can make customer relationships more durable.

An Ecosystem Can Be More Valuable Than Its Parts

The next step is expansion.

If a company already supplies one product to a customer, introducing another compatible product can be easier than starting a completely new relationship. Hardware can lead to software adoption; software can make additional connected devices more useful; accumulated data can increase the value of keeping different tools within the same environment.

Axon's growth in recurring revenue helps illustrate why investors pay attention to this model. In the first quarter of 2026, annual recurring revenue reached $1.5 billion, up 35% from a year earlier, while Software & Services revenue also increased 35%.

The importance of these figures goes beyond software simply becoming a larger business.

Recurring relationships can give a company repeated opportunities to introduce additional services to an existing customer base. In that sense, the value of acquiring a customer may increase when the relationship extends across multiple products.

But an ecosystem is not automatically a moat. Bundling more products together creates complexity as well as opportunity. Customers still need to see value in each part of the offering, competitors can develop alternatives, and technological change can weaken advantages that once looked permanent.

The real test is whether the ecosystem consistently makes the customer relationship stronger.

Investors Need Evidence That the Moat Produces Returns

This is where the investment perspective becomes important.

It is easy to describe a company as having strong technology, loyal customers or a powerful platform. Those characteristics become financially meaningful only when they eventually appear in the economics of the business.

A durable competitive position might help a company retain customers, expand revenue within existing accounts, protect pricing, improve margins or generate attractive returns on the capital invested in growth.

Without those outcomes, “moat” risks becoming little more than a flattering description.

Investors can therefore look for evidence rather than labels. Is recurring revenue expanding? Are customers adopting additional products? Does the company need increasingly large amounts of spending to maintain the same growth rate? Can profitability improve as the ecosystem becomes larger?

Axon itself has set ambitious long-term financial objectives. The company has outlined a target of approximately $6 billion in annual revenue and an adjusted EBITDA margin of around 28% by 2028. Achieving scale while improving profitability would provide a different kind of evidence than revenue growth alone.

Ultimately, that is what separates a competitive advantage from a good story about one.

A moat is not valuable because competitors find a company impressive. It is valuable because competition has a harder time taking away the customers, economics or opportunities that make the business attractive.

For investors, the strongest evidence often appears gradually. A successful product wins an order. A broader ecosystem can extend the relationship. Recurring revenue can make that relationship visible in financial statements. And, if the model works as intended, scale can eventually turn those relationships into stronger economic returns.

That is why the most interesting question about a technology company's moat is not simply how difficult it is to compete with today.

It is whether that difficulty can still be seen in the company's financial performance years from now.