Red Cat Holdings Inc. (RCAT:NASDAQ) provided a financial and operational update highlighting its achievements during Q1/25, noted a news release.
"Red Cat continues to see significant global demand and year-over-year growth with a strong pipeline and backlog," Chairman and Chief Executive Officer Jeff Thompson said in the release "This is being driven by strong domestic and international adoption and sales across our entire Family of Systems."
Operationally, Red Cat presented drone solutions to high-level officials at multiple defense conferences during Q1/25. These included the U.S. Marine Corps at the Modern Day Marine event, domestic and international Special Operations Forces (SOF) at SOF Week, and European Union and North American Treaty Organization forces at Eurosatory 2024, the largest international exhibition for the land and air-land defense and security industry, held this year in Paris, France.
Also at Eurosatory 2024, the drone manufacturer announced it developed a new family of small intelligence, surveillance and reconnaissance and precision strike systems for multi-domain operations. These are an alternative to the conventional, high-cost and non-retrievable systems on the market.
Red Cat closed its acquisition of FlightWave Aerospace Systems, a California-based company specializing in development of long-range, autonomous vertical takeoff and landing (VTOL) drones and sensors. Its products include the Edge 130 Blue commercial-use, military-grade tricopter.
Further, Red Cat launched an independent, industry-wide consortium of robotics and autonomous systems called the Red Cat Futures Initiative. Its mission is to "leverage cutting-edge technologies to bridge critical gaps and bolster support for our warfighters through open architecture and interoperability," according to the company's website.
"We look forward to integrating the Edge 130 Blue into our Family of Systems, which will open new revenue streams and partnership opportunities with companies in our Futures Initiative," Chief Financial Officer Leah Lunger said in the release.
As for Red Cat's financial highlights of Q1/25, the company generated $2.8 million ($2.8M) in revenue, reflecting a 59% year-over-year increase. At quarter's end, the company had $7.7M in cash and a record contract backlog worth $13M.
Guidance for calendar year 2025 is $50−55M, which according to Thompson, "will continue our growth trend as we await news around the U.S. Army's Short-Range Reconnaissance program of record and prepare to scale up production capacity."
Red Cat's Q1/25 earnings conference call can be accessed online here or on the company's website until Dec. 22, 2024. A phone replay, available until Oct. 7, 2024, can be accessed by calling 1-877-344-7529 (domestic) or 1-412-317-0088 (international), and using access code 2058195.
Building a Family of Systems
Red Cat Holdings is a drone technology company integrating robotic hardware and software for military, government, and commercial operations. Based in Puerto Rico, Red Cat continues to expand its portfolio of low-cost, portable unmanned reconnaissance and precision lethal strike systems, the company said.
Red Cat has all the necessary certifications for supplying its products to armed forces and other governmental agencies and has been awarded multiple military contracts to date. Based in Puerto Rico and with a manufacturing facility in Utah, the company is the only public U.S. small defense drone manufacturer that can produce on a large scale, Technical Analyst Clive Maund highlighted in a July 15 report.
One of Red Cat's wholly owned subsidiaries is Teal Drones, whose products are the Teal 2 and FANG. The Teal 2, Blue UAS certified, is a small unmanned system offering the highest-resolution thermal imaging in its class. FANG is the industry's first line of first-person-view drones, optimized for military operations with precision strike capabilities and compliant with the National Defense Authorization Act. Red Cat has significant market potential for FANG, noted Lunger in the release.
FlightWave, Red Cat's newly acquired subsidiary, is behind the Edge 130 VTOL tricopter, featuring a hybrid fixed-wing and rotary design that delivers endurance, range and flexibility that are superior to traditional drone platforms. Recently, the U.S. Department of Defense approved the system for government use, and FlightWave was awarded $1.9M through a U.S. Air Force funding program. The company will use the funds to enhance the product.
Drone Use on the Rise
Around the world, drone use is on the rise, whether for military/defense, commercial or personal purposes, and continued growth in each market is expected.
"Looking ahead, the drone industry is poised for continued innovation and widespread growth," a Drone Expo article noted." Key trends include the expansion of precision agriculture applications, the rise of delivery and logistics services driven by e-commerce demands and general advancements in drone endurance, payload capacity and operational autonomy."
The article attributes present and future growth to technological advancements, aviation integration, changing regulations, venture capital funding and public awareness and acceptance.
Looking at the specific global drone markets, the military segment is projected to reach $22.03 billion ($22.03B) in value by 2028 from $15.8B in 2023, according to The Business Research Co. Government funding, a surge in terrorism, the rising popularity of drone swarm technology and innovation are said to be the primary growth drivers.
As for the global fixed-wing VTOL UAV market, it is estimated to reach $4.6B in size by 2030 from $842M in 2022, reflecting a 23.7% compound annual growth rate, a Market and Markets report indicated.
Fixed-wing unmanned aerial vehicles (UAVs), like FlightWave's Edge 130, are ideal for operations requiring longer, high-speed and more stable flights and for carrying heavy payloads, according to The Brainy Insights. As such, they are used mostly in long-distance missions like monitoring, mapping and surveying. Though they are used in defense, demand from the commercial space is rising.
With respect to the global commercial drone market, it is forecasted to explode over the next 10 years, hitting $1.4 trillion in value by 2034 from $60.37B in 2024, according to Precedence Research. This expansion reflects a 37% compound annual growth rate.
The Catalyst: Increasing Defense Spending
If the U.S., Europe and potentially other countries boost their defense budgets and spending, as current indicators suggest, this could catalyze Red Cat's stock.
Given the current geopolitical landscape, the U.S. is considering increasing defense spending, according to a Sept. 23 U.S. Global Investors article. This week, Chair of the National Defense Strategy Jane Harman, recommended to Congress that the country return "to the levels of spending on national defense, proportionally, as we did in the Cold War." Military spending now is about 15−16% less than it was during the height of the Cold War in the early 1950s.
Also, if Europe heeds the recommendation of Mario Draghi, former Prime Minister of Italy and former head of the European Central Bank (ECB) in his recent report, it too will be spending more on defense. Draghi outlined a plan to increase national defense budgets.
Further, U.S. Global reported, the defense sector is seeing an influx of private equity and venture capital, an outlier given a decrease in this type of funding across most other sectors. Almost $2.6B were poured into 25 funding rounds as of Sept. 1, exceeding the total for the 12 months of 2023, according to S&P Global.
"Defense is clearly becoming a priority for investors, and this trend is only expected to grow as Europe gears up for increased military expenditures," U.S. Global Investors wrote.
Due to support from government defense spending, defense stocks tend to be stable, less sensitive to economic cycles, according to a Sept. 23 StockMarket.com article.
"The defensive nature of these stocks often makes them attractive during uncertain market conditions, providing a measure of safety for investment portfolios," the article noted.
27% Upside in Buy-Rated Stock
Technical Analyst Maund has a Strong Buy rating on Red Cat and recommends investors stay long in it. He wrote that sector growth and the U.S.' need for drones bode well for domestic manufacturers.
"The drone industry is experiencing a period of massive growth as drones have become a key component of modern warfare," he wrote. "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."
Ladenburg Thalmann's Mattson also has a Buy rating on Red Cat plus a price target implying 27% upside from the stock's current price, as noted in his June 14 initiation report. The company should benefit from increasing uses of small UAVs and from the U.S. governmental approvals given to its products, the analyst wrote.
Ownership and Share Structure
According to Reuters, management and insiders own 21.92% of Red Cat. The Top 3 are CEO Jeffrey Thompson with 16.35% or 12.29M shares, Allan Evans with 1.78% or 1.34M shares and Director Nicholas Liuzza with 1.35% or 1.02M shares. Other strategic investors are CFO Leah Lunger, Chief Technology Officer George Matus and Directors Joseph Freedman, Paul Funk and Christopher Moe.
Institutional ownership accounts for 19.62% or 14.75M shares. The Top 3 institutional investors are AWM Investment Co. Inc. with 5.95% or 4.47M shares, AIGH Capital Management LLC with 3.99% or 3M shares and The Vanguard Group Inc. with 1.89% or 1.42M shares.
The rest is in retail.
Red Cat has 75.18M outstanding shares and 54.81M free float traded shares.
Its market cap is $237.58M. Its 52-week range is $0.525−3.48 per share.
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