Drone Tech Co. Unlocks $15B Defense Spending Supercycle
Research Report

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Disclosures for Needham & Co., Red Cat Holdings Inc., October 10, 2025:

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Needham & Co. Analyst Austin Bohlig maintained his firm's Buy rating on Red Cat Holdings Inc. (RCAT:NASDAQ) and a US$17 price target in an updated research note on October 10 after attending a day of investor meetings in Boston with the company's chief financial officer.

Feedback from investors was notably positive, highlighting a growing interest in the rapidly expanding drone and defense technology sector, Bohlig wrote.

While Needham believes we are still in the early stages of this investment cycle, with many investors still assessing where to allocate capital, the level of engagement has clearly increased. Investors were particularly interested in the near-term visibility provided by the SRR2 production ramp, along with Red Cat’s emerging opportunities in unmanned surface vessels (USVs) and international defense markets, which together suggest a multi-year growth trajectory.

Update on SRR2 Contract and Supply Chain

A major focus of our investor meetings was the ramp-up of the U.S. Army’s Short Range Reconnaissance Tranche 2 (SRR2) program and the timing of a full-rate production (FRP) award.

Bohlig said the firm continues to believe that the U.S. Army will authorize Red Cat for an FRP in the fourth quarter of 2025, representing a US$100 million+ annual revenue opportunity in 2026 and 2027, marking a pivotal inflection point in Red Cat’s growth trajectory.

"Beyond SRR2, a major theme across investor discussions was Red Cat’s broader opportunity set as the U.S. defense budget enters a generational shift toward unmanned systems," the analyst said. "While visibility around the next major program win remains limited, we believe the company’s pipeline is robust, supported by the unprecedented surge in funding for drones and autonomous systems across the One Big Beautiful Bill (OBBB) and the FY26 defense budget.

Underappreciated USV Opportunity

One of the most intriguing takeaways from the investor meetings was the underappreciated opportunity emerging from Red Cat’s Blue Ops and unmanned surface vessel (USV) initiative, Bohlig noted. Many investors viewed this business as a longer-term R&D project with commercialization beginning in 2027.

However, by licensing proven battlefield-tested technology from a U.K. defense partner with operational validation in Ukraine, Red Cat appears positioned to fast-track development and commercial entry.

"We see meaningful upside to FY26 estimates should early Blue Ops execution translate into follow-on production orders," the analyst wrote.

Growing International Sales Pipeline

Investors were also intrigued by the untapped international opportunity, which Needham sees as another key growth driver in Red Cat’s long-term story. With investors curious about the timing and size of these NATO orders, Bohlig said the company is well-positioned to secure its first NATO order in the fourth quarter of 2025, with initial deal sizes ranging from US$2–20 million per country.

"We believe the unmanned aerial systems (UAS) industry is entering a multi-year supercycle, and view Red Cat as uniquely positioned to capture accelerating demand for defense-grade small ISR drones as the U.S. looks to restore drone dominance," he wrote. "We think the company's most significant near-term opportunity is the U.S. Army's Short Range Reconnaissance Tranche 2 (SRR2) program of record, which we view as a transformational contract for Red Cat."

After making the necessary adjustments to meet Army requirements for extended flight endurance, the analyst wrote that the company is now set to significantly increase shipments under SRR2 starting in the fourth quarter of 2025 and continuing through 2026, representing at least a US$200 million opportunity over the next two years.

Beyond SRR2, Red Cat’s extensive drone portfolio, combined with its entry into unmanned surface vehicles, positions the company as a multi-domain defense provider at the heart of an unprecedented US$15 billion U.S. defense spending cycle on next-generation unmanned solutions, the report said.

Additionally, the author said he sees substantial potential for international expansion as allied governments accelerate the adoption of unmanned solutions.

Valuation Thesis

The combination of increasing SRR2 production, rising defense spending both domestically and internationally, and expanding into new unmanned domains creates multi-year tailwinds that should lead to substantial growth and margin expansion, Bohlig wrote. This, in turn justifies a premium multiple compared to the drone comparison group.

"Applying a 15x multiple to our 2026 revenue estimate of $125M yields a price target of US$17," he noted.