Autonomous drone maker Red Cat (RCAT) is entering a promising new sector: autonomous ships. Meanwhile, the firm’s core drone business should get big boosts from developments in the Strait of Hormuz and Ukraine, while worries about its profitability appear to be overdone.
Finally, although the headline valuation of RCAT stock is extremely high, a closer look shows that the stock is actually not expensive.
After analyzing RCAT, I believe that long-term, risk-tolerant investors should consider buying the shares.
The New Autonomous-Ship Business Can Become a Blockbuster
Over the 12 months that ended in March, Red Cat built an autonomous-ship business. CEO Jeff Thompson, who referred to the boats as USVs (Unmanned Surface Vessels) during the firm’s Q4 earnings call, noted that such ships had been very successfully deployed against the Russian Navy. RCAT’s USVs are “designed to operate either autonomously or in manned-unmanned teaming…configurations,” the company has stated.
Reporting that RCAT’s USV factory had become “operational” in February, Thompson expected the plant to “have full rate production tooling” by the end of March, and he estimated that it can churn out more than 100 of the ships this year. Eventually, the factory will be able to produce “thousands” of USVs annually, he indicated.
Instead of “billion-dollar (Navy) ships escorting tankers” in the strait of Hormuz, “30 or 40” USVs should instead do the job, said the CEO, suggesting that this would be a much more cost-effective, efficient solution.
Given the U.S. military’s inability to find a viable means of combating the Iranians’ Strait of Hormuz blockade, the Pentagon will in all probability be looking for ways to protect ships in the waterway and to handle other, similar situations.
Red Cat’s USVs could very well be an integral part of such operations. Indeed, Thompson said that the ships, in addition to assisting with the situation in the Persian Gulf, “could be very helpful in Venezuela, in the U.S. Virgin Islands, the Gulf of America, (and) Cuba.”
Given these points, there’s a good chance that the Department of War will look to purchase many of Red Cat’s USVs.
Recent Developments Could Boost Red Cat’s Drone Business
Drones account for the majority of Red Cat’s revenue, and the company’s top line came in at $26.2 million in Q4, representing gigantic gains of 1,985% and 172% , respectively, versus the same period a year earlier and the prior quarter, respectively.
Opportunities in Ukraine and opportunities involving anti-drone drones will likely enable the company’s growth to continue to be quite elevated going forward.
After meeting with Ukrainian officials and giving Kyiv an opportunity to test Red Cat’s drones, the company received “a letter of request” from the Ukrainians, who are looking to purchase a total of more than 25,000 drones of the type that RCAT makes, Thompson reported.
Moreover, RCAT announced on March 30 that it was partnering with a Ukrainian state-owned company on the development of “next-generation unmanned and robotic systems. ”
Reading between the lines, it seems very likely that the Ukrainians will purchase at least several thousand drones from Red Cat.
Thompson also noted that the company’s drones can destroy Iran’s drones at very low costs, likely making RCAT’s aircraft quite appealing to the Pentagon.
Overdone Worries About Profitability and a Look at Valuation
At the moment, Red Cat’s gross margins are quite low, sparking concerns about its profitability. But gross margins tend to increase as sales rise due to economies of scale, and Red Cat’s sales are certainly climbing very rapidly, while the latter trend looks poised to continue for the foreseeable future. Therefore, I believe that these worries will fade over the longer term.
On the valuation front, the stock has an extremely high trailing price-sales ratio of 31.7 times. But based on analysts’ average 2027 sales estimate for RCAT of $209.6 million, the stock’s forward price-sales ratio is 7.6 times, which is reasonably attractive, given the company’s strong growth and powerful, positive catalysts.
The Bottom Line on RCAT Stock
Red Cat looks very well-positioned to benefit prolifically from developments in Iran and Ukraine, while worries about its profitability are overdone and its valuation is reasonably attractive. But since its sales are relatively low and it’s not yet profitable, the shares are best-suited for long-term, risk-tolerant investors.
*This article is intended to be informational only; it is not financial advice.
