In a June 7 research note, ThinkEquity analyst Ashok Kumar initiated coverage on Red Cat Holdings Inc. (RCAT:OTCMKTS) with a Buy rating and an $8 per share target price; its current share price is around $3.26.
Kumar presented the investment thesis for this Puerto Rico–headquartered company in the unmanned aerial vehicle industry.
Red Cat Holdings "is positioned to capitalize on the maturing drone market with high-performance products and business services for a variety of industries," Kumar wrote.
He explained that Red Cat, founded in 2016, today encompasses four operating subsidiaries. Its original subsidiary, Rotor Riot, designs, purchases and resells drones and drone components from manufacturers (historically providing half of Red Cat's revenue).
Red Cat's current project is Dronebox, a block-chain-based software solution that records, stores and analyzes flight- and drone-obtained data, to be offered on a software-as-a-service (SaaS) basis. Dronebox is a second subsidiary.
A third subsidiary, Fat Shark, which Red Cat acquired in 2020, provides drone products, including headsets and goggles for use in first-person-view piloted flights.
"Fat Shark is expected to constitute a majority of revenue and results of operations," Kumar wrote. "This transformative acquisition will enable an encrypted, distributed network that provides secure data storage, operational analytics, reporting, and SaaS solutions for the drone market."
The newest addition, Skypersonic, the fourth subsidiary as of May 2021, provides software solutions for GPS-denied, high-risk drone flights remotely piloted via the Internet.
"Red Cat gets competitive advantages by leveraging the three companies [Rotor Riot, Fat Shark and Skypersonic]," wrote Kumar, "to move beyond selling drones into selling drone services and solutions." For instance, Red Cat can combine its Skypersonic remote-piloting system with the Fat Shark digital video technology to offer differentiated systems. Also, Rotor Riot can expand a U.S.-manufactured drone solution for multiple and various inspection activities. Red Cat is pursuing expansion into government and military applications.
Kumar noted that Red Cat's current business strategy, shifted in 2020, is designing, developing and selling products for the drone industry. Previously, the company concentrated on researching and developing software for cloud-based storage, analytics and services.
In terms of opportunity for Red Cat, Kumar pointed out that shipments of Internet of Things enterprise drones is expected to increase to 4.1 million units from 0.5 million between 2019 and 2029, according to Gartner data. The highest-growth areas are predicted to be construction monitoring and retail fulfillment. The geographic area to which most shipments are forecast to go is North America, and Red Cat is well positioned to serve this market, he noted.
Also beneficial for Red Cat, Kumar indicated, is the advantages to companies of using drones instead of people to carry out certain tasks. Namely, drones are quicker and more efficient.
"Red Cat's drone-as-a-service business model ... will be a driver of the company's growth," Kumar wrote.
Regarding finances, Red Cat has about $14.5 million from a public common stock offering, Kumar relayed. Of that, the company plans to use about $4.6 million for Dronebox licensing and for developing a sales, marketing and customer support team for its drone services. It set aside $6.9 million for future accretive acquisitions of complementary businesses.
ThinkEquity estimates revenue will grow to $38.8 million in fiscal year 2023 from $4.9 million in fiscal year 2021, Kumar indicated.
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Disclosures from ThinkEquity, Red Cat Holdings Inc., June 7, 2021
Analyst Certification
The analyst, Ashok Kumar, responsible for the preparation of this research report attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers; and (2) that no part of the research analyst’s compensation was, is, or will be directly related to the specific recommendations or views in this research report.
Financial Interests
The analyst, Ashok Kumar, has no financial interest in the debt or equity securities of the subject company of this report. Further, no member of his household has any financial interest in the securities of the subject company. Neither the analyst, nor any member of his household, is an officer, director, or advisory board member of the issuer(s) or has another significant affiliation with the issuer(s) that is the subject of this research report. The analyst has not received compensation from the subject company. The CEO of ThinkEquity, a division of Fordham FInancial Management, owns shares in the company. At the time of this research report, the analyst does not know, or have reason to know, of any other material conflict of interest.
ThinkEquity is a division of Fordham Financial Management, Inc. (Fordham), a member of FINRA and SIPC. Fordham or an affiliate does not have a client relationship with and has not received compensation from this subject company Red Cat Holdings, Inc. in the last 12 months. Fordham expects to receive or intends to seek investment banking business from the subject company in the next three months. Fordham does not make a market in the securities of the subject company of this report at the time of publication. Fordham does not hold a beneficial ownership of more than 1% or more of any class of common equity securities of the subject company.
