DroneShield Ltd. (DRO:ASX; DRSHF:OTC) is a leading provider of counter-drone (C-UAS) solutions specializing in detecting, identifying, and defeating drones.
Its systems are designed to protect a wide range of assets, including military personnel, critical infrastructure like airports and power plants, and government buildings.
By offering a variety of technologies, from signal jamming to other neutralization methods, DroneShield helps organizations and governments mitigate the risks associated with unauthorized drone activity in an increasingly drone-dependent world.
Rising Drone Market
The global military drone market is poised for significant growth, projected to reach US$36.1 billion in 2023 and expand at a CAGR of 14% through 2030. The U.S. DOD estimates the counter UAS market (kinetic, non-kinetic, and mixed systems) to be ~US$1.8 billion in 2025, with an additional US$106m in civilian authority applications.
More specifically, Channel Checks indicate military procurement by the U.S. is estimated to be ~US$2.5b for both offensive and defensive applications. This rapid expansion is driven by advancements in drone technology, including enhanced endurance, payload capacity, stealth features, and the integration of AI and advanced sensors. These advancements are enabling drones to perform a wider range of military operations, from surveillance and reconnaissance to combat and logistics.
Furthermore, the increasing adoption of autonomous and semi-autonomous systems on both land and sea, alongside the rise of smaller, tactical drones, is contributing to TAM expansion amid unique use cases. The integration of drones into networked warfare systems and civilian infrastructure and the development of counter-drone technologies are also key factors driving this dynamic market.
Commercial markets are also becoming increasingly important as incursions by nefarious actors at airports or stadiums often cause unrest. As a result, governments are seeking to adopt C-UAS systems to combat potential disruption of the public or key events.
Revolutionizing Modern Warfare
Drones have proven to be a game-changer in the Ukrainian conflict, particularly within the context of asymmetric warfare. By enabling remote surveillance and reconnaissance, they minimize human risk in dangerous situations. Equipped with advanced sensors, drones provide critical intelligence on enemy movements and positions, significantly enhancing situational awareness.
Moreover, their integration with artillery units has dramatically reduced targeting times, increasing the speed and accuracy of fire while minimizing the exposure of human observers. The constant presence of drones also disrupts enemy operations and exhausts their resources while also providing significant cost savings in both human and economic capital. Finally, the effective integration of drones with human teams has demonstrated the significant advantages of human-machine collaboration in achieving improved operational outcomes and efficiencies for the Ukrainian forces.
Drones have revolutionized asymmetric warfare by enabling less technologically advanced adversaries to pose significant threats to powerful militaries. Inexpensive and readily available, drones can be used to target and potentially disable high-value military assets like tanks at a fraction of the cost, creating a significant impact despite technological disparities. This asymmetry is particularly pronounced against Western militaries that often rely on a small number of very expensive assets.
By demonstrating the potential to neutralize these assets with relatively low-cost drones, adversaries can pose a credible threat, even with limited technological sophistication. This highlights how the accessibility of drones has fundamentally shifted the dynamics of warfare, empowering less powerful actors and emerging market militaries to challenge more technologically advanced adversaries. This paradigm is shifting quickly, and it will be paramount for militaries around the world to adjust rapidly to this changing landscape to preserve stability.
Droneshield Set to Benefit From This Shift
After a substantial step up in revenue growth and profitability in 2023, the stock rallied to all-time highs mid-year in 2024 amidst investor enthusiasm for the small-cap defense contractor. Subsequently, the stock price has seen pressure following an equity raise, which helped the company exit FY24 with ~US$220m. The company's cash position is also accompanied by inventory (~US$200m of completed or in progress by sale value held) and near completion of expanding its Sydney facility to support up to AU$500m/yr (US$317 million) of manufacturing capacity.
This correction is likely overdone as the company re-aligns its growth strategy and optimizes utilization of its Sydney facility to match demand. In addition, defense procurement cycles could end up being simplified (e.g., efforts by DOGE in the U.S.) and accelerate revenue recognition for key contracts. In addition, the recent integration with Epirus (which owns ~2% of Droneshield) presents an interesting differentiation for customers that may require mixed systems (hard + soft kill) and could drive growth in adoption for its products (software and hardware alike).
Overall, Droneshield presents an attractive entry to a profitable defense company positioned to benefit from the military and commercial growth of C-UAS solutions. In my view, the integration with Epirus (hard-kill directed energy laser technology platform), as well as the offering of a full-product suite for C-UAS customers, serves as a key differentiator for Droneshield.
One can look to the recent Nato Framework agreement, US$11.8 APAC contract, and upcoming Land156 contract in Australia as key opportunities for Droneshield to gain market share. In addition, in terms of technology, radar (vs. frequency) presents them with a unique opportunity to be one of a few platforms capable of defending against a swarm.
Valuation
I estimate Droneshield is worth US$1.60/share based on a 25x EV/EBITDA multiple on FY26 revenue, which is in line with w/peers in the defense and C-UAS sector (Leondaro, Axon, and AeroVironment). The capital raise, alongside the removal of preferred equity and debt, creates an attractive entry for investors and a limited downside with US$220m in cash (~$0.24/share fully diluted). The company has the ability to ramp up new product iterations and fund R&D for new products, strategic acquisitions, or other drivers of growth.
The current market cap of US$360m implies 6x EV/EBITDA on FY26 revenue, a discount to its peers assuming revenue growth in line with industry CAGR. Further, should the company see accelerated pipeline conversions or commercial adoption, Droneshield's recent facility expansion positions it well to meet additional demand.
In the bear case, I assume the company struggles to unload inventory, converts half of its pipeline, and receives a small portion of the Land156 contract, translating to a value of US$1/share. Ultimately, it's increasingly likely in either case, an intelligent investor could purchase a company approaching US$100m+ in top-line revenue coupled with w/recurring software, the combination of which has the potential to drive earnings growth and FCF generation in a sector that is known for its ‘sticky' customer base.
Upcoming Catalysts
Land156 procurement in Australia for between AU$300-500m, or a portion of the total, could be awarded, which is currently included in its pipeline. More information is expected by mid-year (June) at the earliest.
REFERENCES:
https://www.grandviewresearch.com/industry-analysis/military-drone-market-report#:~:text=The%20global%20military%20drone%20market,payload%20capacity%2C%20and%20stealth%20features
https://www.visionofhumanity.org/how-drones-have-shaped-the-nature-of-conflict/#:~:text=Drones%20can%20undertake%20reconnaissance%20and,military%20drones%20using%20precision%2Dguided
https://www.droneshield.com/investor-relations
Important Disclosures:
- As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of DroneShield Ltd.
- Chase Barlow: I, or members of my immediate household or family, own securities of: DroneShield Ltd. I determined which companies would be included in this article based on my research and understanding of the sector.
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