No Use Limits, Strong Demand Are Good for U.S. Drone Cos.

Recent efforts to enact binding rules governing the use of lethal autonomous drones by militaries worldwide failed to gain ground, and demand for all types of defense unmanned aerial vehicles (UAVs) is on the rise, good news for companies developing and supplying them.

"The result has been to tie the debate up in a procedural knot with little chance of progress on a legally binding mandate any time soon," an article in The New York Times noted.

Lethal autonomous (self-piloted or artificial intelligence [A.I.]-controlled) drones, also called kamikaze, suicide, loitering munition, target, and exploding drones, are armed weapons that can hover over the area of a target until identifying it, then navigate themselves directly into the target and explode.

"Autonomous drones play a significant role in today's conflicts, asserted Drone Life. "They augment their human operators, delivering critical goods to dangerous locations, detecting dangers, and rapidly resupplying units. In the right scenarios, drones can conduct life-saving missions."

Certain countries like Austria are pushing for imposed limits, but others, including the U.S., Russia, Australia, and Israel, refute there is a need for such restrictions now.

The current Hamas-Israel conflict brought a sense of urgency to this issue, the Times article indicated. This is because in their fighting, reportedly Hamas has deployed suicide drones, and mostly for indoor combat in small spaces, the Israel Defense Force has used autonomous drones.

"Autonomous drones play a significant role in today's conflicts, asserted a September 2023 article in Drone Life. "They augment their human operators, delivering critical goods to dangerous locations (e.g., blood to the front lines), detecting dangers (e.g., hidden land mines), and rapidly resupplying units. In the right scenarios, drones can conduct life-saving missions."

Drones' widespread usefulness in the defense setting translates to a continuing and growing need around the world for both human- and self-piloted drone systems.

The Catalyst: The Rise of A.I-Powered Drones

Forecasts predict appreciable growth of the global military drone market over the next handful of years.

Specifically, it is projected to reach US$17 billion in value by 2027 from US$12 billion in 2022, a 42% increase, according to MarketandMarkets, a market research platform. In the subsonic category, into which most military drones fall, the increasing demand for lethal self-piloted drones will boost the growth of the greater than 300 kilometers per hour (300 km/hr) segment.

Expanding the use of tactical drones for in situ recovery applications will boost growth in the 100−300 km/hr segment, and rising demand for small drone platforms will boost growth in the less than 100 km/hr segment.

The global military drone market is projected to reach US$17 billion in value by 2027 from US$12 billion in 2022, a 42% increase, according to MarketandMarkets.

The new innovative defense technology, Politico pointed out in a November 2023 article, is "often supplied directly by newer, smaller manufacturers, outside the traditional nation-to-nation negotiations for military supplies."

From an investment point of view, these types of companies in the U.S. are the ones to watch, given the country, according to Statista, remains the leader of drone technology.

Red Cat Holdings Inc.

One such U.S. company is Red Cat Holdings Inc. (RCAT:NASDAQ). Headquartered in Puerto Rico and with a manufacturing facility in Salt Lake City, Utah, the company develops and manufactures robotic hardware and software for use in aerial military and other operations.

One of its products, designed for warfighting in darkness, is the Teal 2 small unmanned aircraft system (SUAS), outfitted with ultra-high-resolution thermal imaging. Red Cat Holdings describes the drone as modular, rugged, secure, and easy to fly. The Teal 2 is UAS Blue, meaning it is U.S. Department of Defense approved. It complies with the Federal Aviation Administration's Remote ID requirement, meaning it can provide identification and location in flight via a broadcast signal.

Red Cat had about a US$7.5 million ($7.5M) backlog of Teal 2 orders as of September 20, 2023, ThinkEquity Analyst Dr. Ashok Kumar wrote in a research report. He forecasted the company's total revenue would increase 88% between fiscal years 2023 and 2024, rising to US$18.6M from US$9.9M. 

"Fiscal 2024 will be a year of Teal 2 production, sales and revenue," Kumar wrote.

ThinkEquity rated Red Cat Holdings Buy and assigned it a US$5 per share target price.

Technical Analyst Clive Maund also recommended in July 2023 that investors "stay long" in RCAT.

As for Red Cat Holdings' share structure and ownership, 37.27% of the stock is held by management and insiders.

Reuters notes that CEO Thompson owns 22.13%. CEO of Fat Shark RC Vision Systems Gregory Ralph French has 8.67%. COO Allan Thomas Evans has 2.41%. Director Nicholas Liuzza has 1.76%. CFO Joseph Hernon has 0.47%, and CEO of Teal Drones George Matus has 0.58%.

Institutional investors have 9.01%. The Vanguard Group Inc. has 2.3%. Pelion Venture Partners has 1.62%. BlackRock Institutional Trust has 0.61%, and Geode Capital Management LLC has 0.49%.

The rest is in retail. 

Red Cat Holdings has a market cap of US$53.74 million, with 55.54 million shares outstanding, and trades in a 52-week range of US$1.54 and US$0.7676.

Firestorm Labs Inc.

Another U.S. company in the defense drone sector, in which Red Cat Holdings has invested, is Firestorm Labs Inc. Launched in 2022, this private company headquartered in San Diego, California., is building wholly modular unmanned aerial systems (MUAS), rapidly, cheaply and in large quantities for use by militaries.

The modular nature allows customers to modify the configuration and operation of the drone based on needs in the field. Firestorm creates the components chosen for a system with three-dimensional printers and then uses a flight computer equipped with artificial intelligence and machine learning applications to cement the pieces together, a DroneDJ article described.

"The process," Firestorm Co-founder Dan Magy told DroneDJ, "is capable of producing a 25-pound capacity drone in about nine hours, fully testing it in roughly 24 hours, and delivering it to end users for set-up and deployment between 48 and 72 hours of ordering."

Red Cat Holdings' CEO Jeff Thompson told Defense Advancement that "Firestorm is changing how UAVs can be designed, manufactured and delivered quickly, and the Firestorm system solves a lot of problems for many critical situations. Their long-range and long-duration loitering capabilities are a cost-effective approach to winning in the air."

Just last month, Firestorm partnered with the Air Force Special Operations Command and the Air National Guard to expedite the development of the company's expeditionary manufacturing unit, xCell, to build MUAS on a mass scale, noted a news release.

"The U.S. Air Force's use of xCell will revolutionize the U.S. Department of Defense's reliance on traditional manufacturing processes that disable the real-time production and replenishment of capabilities critical to deterring adversaries," the release explained.

While Firestorm is private, it may be one you want to keep an eye on as the sector is bolstered. 

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1. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of [Red Cat Holdings Inc.].
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