Droneshield plummets over 43% in a week: Key takeaways for investors

After a sustained period of decline, the counter-drone defence technology company $Droneshield Ltd (DRO.AU)$ shares finally experienced a modest uptick yesterday, rising 3.87%. Droneshield's share price has plummeted over 43%, marking a significant retreat from its 52-week high of A$2.72 reached last week.

What happened?
1. Rodney Forrest shorted Droneshield
Last Tuesday, the Australian Securities Exchange (ASX) paused the trading of Droneshield shares as they traded at an all-time high prior to dropping more than 28%. Then, Droneshield stated it was unaware of any undisclosed significant information but highlighted a Capital Brief article featuring Rodney Forrest of Sublime Funds Management, who had shorted the stock due to its "wild" valuation. The company suggested this media coverage was likely the cause of the share price drop.

Rodney Forrest shorted Droneshield for several reasons:
-Cumulative losses sit at around A$40 million.
-The number of shares has tripled, while the total profits have remained unchanged.
-Insiders sold stocks at 70 cents.
-It has a market capitalization of A$1.8 billion and not a single institutional owner on the register is larger than 0.5%.

Responding to the Capital Brief article and the recent stock performance of Droneshield, Oleg Vornik (CEO of Droneshield) defended his company in the recent investor call, he stated: "If you look at the market like the United States, these technology companies are valued really on their upside." Also, he said: "Droneshield is dealing with a significant market and the counter drone market is already growing at a really rapid pace. DroneShield can become a much, much larger business than it is today and the valuation is incorporating that upside."

2. DRO released quarterly financial results
Droneshield released its second quarter and half-year update on July 22. According to the report, Droneshield's 1H24 revenues were up 110% vs 1H23 (A$11.5 million). Breaking down 1H24 revenue, Droneshield achieved a revenue of A$16.7 million in 1Q24 and a revenue of A$7.4 million in 2Q24, which means a notable slowdown in revenue growth during the second quarter. Also, Droneshield's 1H24 cash receipts increased by 40% vs 1H23 (A$15.3 million). A key distinction between revenue and cash receipts stems from the payment terms of US customers, who typically settle their accounts 30 days post-delivery.

Droneshield has expanded its business in a fast way, its sales pipelines doubled in the last 3 months to A$1.1 billion and USA continues to be the major contributor to its sales. It's worth noting that DroneShield is bullish on its future, citing that the second half of the year, especially the December quarter, has typically seen stronger performance for the company.

Upcoming Investor Focus for DroneShield
Following the half-year update, Bell Potter has revised its recommendation on DroneShield's stock from 'buy' to 'hold,' while raising the target price from A$1.00 to A$1.60. He stated: "The company continues to be an attractive vehicle for exposure to popular investment themes, including geopolitical tensions, increasing use of drones and the rise of AI. However, at its current valuation DRO will attract increased scrutiny over its short-term performance and future contract announcements, thus we anticipate continued share price volatility."

Global conflicts intensify and geopolitical tensions escalate, the use of drones is becoming increasingly widespread among various factions. As the defense sector is fundamentally propelled by contracts, investors are advised to closely monitor potential contract awards for Droneshield in the forthcoming period, as these could significantly impact DroneShield's future prospects. Also, Droneshield states in its quarter report that the second half of the year have traditionally been stronger periods for it.

Other defense stocks to look at?
Other ASX defense stocks to look at: $Elsight Ltd (ELS.AU)$, $Austal Ltd (ASB.AU)$, $Electro Optic Systems Hldgs Ltd (EOS.AU)$ , and $Adacel Technologies Ltd (ADA.AU)$ .

US defense stocks to look at: $Northrop Grumman (NOC.US)$, $Embraer (ERJ.US)$ , $Howmet Aerospace (HWM.US)$ , $L3Harris Technologies (LHX.US)$, $Curtiss-Wright (CW.US)$, $Lockheed Martin (LMT.US)$, $Boeing (BA.US)$ , $RTX Corp (RTX.US)$ .

Wondering what other investment themes are hot now? Use our 【Investment Themes】feature to keep up with the latest trading opportunities, check Moomoo—Markets—US/AU—Investment Themes.