Unusual Machines Inc. (UMAC:NYSEAMERICAN) will make a new drone motor for launch customer Red Cat Holdings Inc. (RCAT:NASDAQ), reported Litchfield Hills Research Analyst Barry Sine in a Feb. 27 research note.
"With this announcement, the company's total addressable market (TAM) in terms of announced components increases by 50%," to $1.9 billion ($1.9B) from $1.3B, Sine wrote.
151% Return Potential
On the news, Sine reiterated Litchfield Hills' target price on UMAC of $20 per share. In comparison, the drone parts manufacturer's current share price is about $7.96. From here, the return to target is 151%.
Unusual Machines' 52-week high and low share price are $23.62 and $0.98, respectively.
The company remains a Buy.
More Parts, More Benefits
Sine pointed out the benefits to Florida-based Unusual Machines of adding additional types of components to its inventory. With this just announced, new motor, the company could provide 64% of the components needed to build a typical midsized drone.
What's more, reported Sine, the drone components firm is about to introduce two more products, one a radio receiver/transmitter (RX), the other a video receiver (VTX). These additions would take increase its requisite drone parts percentage to 86%. It would be able to provide the two receivers, a flight controller, an electronic speed controller, a camera and motors, all components but the drone frame, "which is relatively low tech," noted Sine.
With this expanded capability, the company's TAM would increase another 30%. Also, Unusual Machines could use its own components for its Rotor Riot retail business, now valued at about $5M, thereby increasing its gross margin via vertical integration.
The analyst also highlighted that Unusual Machines is outsourcing the design and manufacture of all of its components to third parties, giving it significant potential to scale up.
"These moves are timely as the [U.S.] commerce department has initiated an Advanced Notice of Proposed Rule Making to ban imports of Chinese drone components," wrote Sine.
Such a trade barrier would open a window of opportunity to Unusual Machines given the U.S. imports almost all drone components from China. The rest comes from a few domestic suppliers.
Series of Catalysts
Sine listed five anticipated, upcoming events that could lift Unusual Machines' share price. They are:
1) The company debuting its RX and VTX.
2) These two new products increasing Unusual Machines' TAM.
3) The U.S. Department of Defense adding the company's motors to its Blue List of approved drone components for military use.
4) Unusual Machines receiving more components customers and orders.
5) Release of the company's Q4/24 earnings, expected in late March, which, Sine wrote, "should show strong retail sales and initial revenue from components." Litchfield Hills estimates revenue for the quarter to be about $2M from retail and about $100,000 from components.
Stock Specifics
Unusual Machines has 13.9 million (13.9M) shares outstanding. Its average daily volume is 5.2 million (5.2M).
The company's market cap is $120.4M.
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