Expert Says You Should Stay Long for a Potential Massive Spike With This Drone Stock
Contributed Opinion

You probably don't need to be told that with wars breaking out around the globe. The drone industry is experiencing a period of massive growth as drones have become a key component of modern warfare. If we add to this that domestic production of drones in the U.S. is not just being encouraged but mandated for political and security reasons, then it is clear that the prospects for leading U.S. manufacturers of drones could scarcely be brighter. As an example of this, the American Security Drones Act of 2023 means that U.S. government agencies cannot purchase foreign-made drones. The Global Military Drone Market is Expected To Reach $18 billion By 2028.

Much of the fundamental information about Red Cat set out just below has been sourced from this informative and wide-ranging article by MULTIBAGGER MONITOR.

Red Cat Holdings Inc. (RCAT:NASDAQ) is the only public U.S. small defense drone manufacturer capable of large scale production and its revenues are growing exponentially due to the success of the Teal 2 drone produced by its subsidiary Teal Drones and with the company's impressive production facility completed Teal can very quickly scale up its current production of hundreds of drones per month to thousands.

The government Short Range Reconnaissance Program (SRR) T2 for the military is now a massive program for approximately 12.000 systems, and the awarding of the contract to supply these systems is now in its final stages. After 37 original competitors for the T2 contract, the only competitor still running for the contract apart from Red Cat is Skydio.

This contract is enormous and will be a game changer for whichever company wins it as it will be worth somewhere between $600 million and $1 billion — to give an idea of its impact, just the upfront payment on the contract would be near to Red Cat's current $85 million market cap. The winner of the T2 contract will be announced in September.

So, what are the chances of Red Cat winning the contract?

I think a good estimate is more than 50%, for while Skydio has invested in some heavy lobbying, the fact is that Red Cat is defense-focused while Skydio is not, and its products have a poor performance record in Ukraine and its products have security and weight issues, a circumstance that will probably work in Red Cat's favor.

So the conclusion must be that, while Red Cat is to a certain extent a speculation here, especially given that its sharp rise over the past week is due to the prospects of its winning this contract, given that the chances of its winning it are probably better than even it is viewed as a worthwhile speculation and here's the thing — even if it doesn't win this contract its products are in big demand, demand which continues to grow. So, in the event of it not winning the contract, we can expect it to sell off some, but then it should form an intermediate base pattern, gather itself together, and advance anew. If it does win the contract, we can expect it to "go ballistic."

Amongst various recent news releases by the company we have Red Cat Introduces New Family of Low-Cost, Portable Unmanned Reconnaissance and Precision Lethal Strike System. In other news Unusual Machines Inc. (UMAC:NYSE) reported it had been chosen to provide the first drone and components in Red Cat Holdings Inc.'s new FANG line of First-Person View (FPV) systems .

Turning now to the stock charts, we can see on the 6-month chart how Red Cat stock has risen sharply over the past week, which we can take to be due to investors starting to salivate over the prospect of the company winning the big contract.

While this rally has clearly resulted in it becoming significantly short-term overbought, which we would normally expect to lead to a period of consolidation or reaction, this speculation is likely to intensify further as the date of the announcement approaches, and so, if anything, it is thought likely that it will continue higher, overbought or not. The volume pattern is powerfully bullish, and the Accumulation line is rising steeply, which supports this contention.

The 5-year chart really puts things in perspective, for on it, we can see that the sharp rally over the past week is nothing exceptional for this stock —back in 2021 when the company was nowhere near as well placed as it is now, it rocketed up to about $7.50 in short order — not just once but twice.

It is, therefore, perfectly reasonable, given the magnitude of the T2 contract and the high probability that Red Cat will secure it, to make the prediction that it will advance in the manner shown by the vertical blue arrow if it does. If it doesn't, then we can expect some speculators to bail, triggering a near-term selloff, but then it should stabilize and turn higher again as the overall positive fundamentals of the company reassert themselves, as shown by the green arrow. What this means is that the risk /reward ratio of Red Cat as an investment is extraordinarily favorable.

The conclusion is that any holders of Red Cat should stay long for a potentially massive spike, and it is rated a Strong Buy here for the same reason.

Red Cat's website

Red Cat Holdings Inc. (RCAT:NASDAQ) closed at $1.75 on July 12, 2024.

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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 Unusual Machines and Red Cat Holdings Inc.
2. Clive Maund: I determined which companies would be included in this article based on my research and understanding of the sector.
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The quoted article represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maund's opinions are his own, and are not a recommendation or an offer to buy or sell securities. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications. Although a qualified and experienced stock market analyst, Clive Maund is not a Registered Securities Advisor. Therefore Mr. Maund's opinions on the market and stocks cannot be  only be construed as a recommendation or solicitation to buy and sell securities.