Growth-orientedis well-positioned for domestic defense, military, and infrastructure opportunities and to move beyond just delivering unmanned aerial vehicles into delivering drone services and solutions, purported ThinkEquity analyst Dr. Ashok Kumar in a Jan. 31 research note.
"The company is focused on building out the Teal organization and preparing it for the multitude of emerging revenue opportunities," Kumar wrote. These primarily lie in the defense and military industries, he noted, given that future wars will require abundant combat and tactical drones.
Teal Drones, one of Red Cat's subsidiaries, sells commercial and government drone technology. Another of its subsidiaries, Skypersonic, provides technology that enables drones to carry out inspections in areas lacking GPS, to record data and to transmit it remotely.
Potential Return for Investors
ThinkEquity has a price target of US$5 per share on Red Cat, currently trading at about US$1.26 per share. The difference between these prices implies a significant potential return for investors. The investment bank's target price on Red Cat is based on projected sales of US$37 million ($37M) in the fiscal year 2024, up from US$11.5M in the fiscal year 2023. Red Cat is a Buy.
Many Key Advantages
Having sold its consumer segment in November 2022 for US$18 million, Red Cat is now solely concentrating on building its enterprise segment and will use this capital to do so, Kumar wrote. The analyst presented the factors working in Red Cat's favor.
1) A new, larger domestic manufacturing facility. Red Cat's new facilities in Salt Lake City, Utah, doubled its manufacturing capacity such that the company now can produce tens of thousands of drones annually. With its current chip inventory, it can manufacture 3,000 drones.
With this expanded infrastructure in place, ThinkEquity expects Red Cat will land additional contracts for Skypersonic's Skycopter or inspection drone. The timeline for this to start is later this year, given the Skycopter is currently being upgraded and made more reliable in a second iteration.
"While this strategy has resulted in higher operating costs, controlling the manufacturing process internally best positions the company to take advantage of sales opportunities rather than relying on third-party manufacturers," wrote Kumar.
2) Existing and prospective partnerships. Red Cat has partnerships with Reveal Technology and Tomahawk Robotics and is expected to cement more. Reveal provides mapping capabilities beneficial for military operations, and Teal's drones now ship with Tomahawk's Kinesis software.
"[Teal's] open platform has allowed partnerships to provide a complete out-of-the-box system," wrote Kumar.
3) Another market for the Skycopter inspection drone. Red Cat is pursuing opportunities with the armed forces. Recent demonstrations at Fort Bragg generated positive feedback.
4) Government contracts. One of Red Cat's government contracts is with the U.S Border Patrol. The company is currently working to fulfill the initial US$1 million order and expects to expand this US$90M contract this year.
"The initial government contracts are a positive indication regarding the future scope and size of additional contracts," Kumar wrote.
5) U.S. Army program and contract. The Short Range Reconnaissance Tranche 2 program, which extends beyond 2030, is "going according to plan," Kumar noted, with the first flyoff having taken place earlier this month. Teal has a $1.5M prototype contract to develop a drone that meets the Army's technical system requirements of SRR T2.
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1) Doresa Banning wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
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Disclosures for Think Equity, Red Cat Holdings Inc., January 30, 2023
Analyst Certification: The analyst, Ashok Kumar, responsible for the preparation of this research report attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers; and (2) that no part of the research analyst’s compensation was, is, or will be directly related to the specific recommendations or views in this research report.
Financial Interests: The analyst, Ashok Kumar, has no financial interest in the debt or equity securities of the subject company of this report. Further, no member of his household has any financial interest in the securities of the subject company. Neither the analyst, nor any member of his household, is an officer, director, or advisory board member of the issuer(s) or has another significant affiliation with the issuer(s) that is the subject of this research report. The analyst has not received compensation from the subject company. The CEO of ThinkEquity, LLC., owns shares in the company. At the time of this research report, the analyst does not know, or have reason to know, of any other material conflict of interest.
Company Specific Disclosures: ThinkEquity, LLC is a member of FINRA and SIPC. ThinkEquity, LLC or an affiliate has a client relationship with and has received compensation from this subject company Red Cat Holdings, Inc. in the last 12 months
ThinkEquity, LLC: ThinkEquity, LLC is a member of FINRA and SIPC. ThinkEquity expects to receive or intends to seek investment banking business from the subject company in the next three months. ThinkEquity does not make a market in the securities of the subject company of this report at the time of publication. ThinkEquity does not hold a beneficial ownership of more than 1% or more of any class of common equity securities of the subject company. This report is for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of an offer to buy any security. While the information contained in this report has been obtained from sources believed to be reliable, we have not independently verified the information and we do not represent or guarantee that the report is accurate or complete and it should not be relied upon as such. Any references or citations to, or excerpts from, third-party information or data sources (including, but not limited to, Bloomberg and Capital IQ) do not and are not intended to provide financial or investment advice and are not to be relied upon by anyone as providing financial or investment advice. Based on public information available to us, prices and opinions expressed in this report reflect judgments as of the date hereof and are subject to change without notice.
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