Drone company Red Cat Holdings sees shares tumble
Red Cat, the unprofitable and inefficient US drone manufacturer is set to slide


One of the key developments in military technology in recent years has been the rapid rise of unmanned aerial vehicles, or drones. Their major advantage is that they allow military forces to carry out attacks and survey the battlefield without either directly risking soldiers’ lives or expensive aircraft.
While drones are not a new technology, they used to be so large and expensive that their use was limited. Over the years they have become much cheaper and smaller, a development that has made them a major part of any modern army’s equipment.
However, as with any form of technology, the rise of drones has led to the creation of a large number of companies trying to cash in on the boom in demand. Inevitably some of these lack the financial acumen or the engineering know-how to achieve their ambitions.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
A case in point is drone manufacturer Red Cat Holdings (Nasdaq: RCAT), which aims to make drones for the US military, as well as for other purposes, such as carrying out safety checks in places where it would be dangerous for people to go.
Has Red Cat jumped the gun?
At the end of last year, Red Cat’s shares more than quadrupled on the news that it had won a competition to supply one of its drones to the US Army. The hope was that this would bring in a large amount of revenue and potentially open the door to contracts with other forces. However, as Kerrisdale Capital point out, there are two problems with this optimistic scenario.
Firstly, the contract, which has yet to be agreed, is likely to be much smaller than the company projects. Demand from the Army (or other US government agencies, such as the Department of the Interior) for the type of drone that Red Cat is selling is likely to be very limited. A bigger long-term problem for Red Cat is that the market for drones is becoming extremely competitive, with a large number of firms keen to grab a share. This has caused the price of drones to start falling.
Several established companies are offering similar drones to those produced by Red Cat for a much lower price. Finally, even if Red Cat did win a large contract, it is an open question as to whether they could fulfil it. This is because the company’s attempts to ramp up production over the past few years have been bedevilled by numerous delays and missed targets, while it has also lost money every year for the last six years.
There is evidence that the hype surrounding Red Cat is already starting to fade away, as its share price has fallen by around 40% from its peak at the start of this year, and it is trading well below its 50-day moving average. As a result, I suggest shorting it at the current price of $8.92 at £150 per $1. In that case, cover your position at $14.92, which would leave you with a total downside of £900.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.
He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.
Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.
As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.
Follow Matthew on Twitter: @DrMatthewPartri
-
Pinewood Technologies: a drive for growth
Pinewood Technologies’ platform is one of the best in the business. Investors should buy in
-
'EV maker Faraday Future will crash'
Faraday Future Intelligent Electric is failing dismally to live up to its name, says Matthew Partridge
-
Investors should cheer the coming nuclear summer
The US and UK have agreed a groundbreaking deal on nuclear power, and the sector is seeing a surge in interest from around the world. Here's how you can profit
-
8 of the best houses for sale with follies
The best houses for sale with follies in the grounds – from a five-storey Victorian Gothic tower in Tonbridge, Kent, to a former mill in Oxfordshire with gardens that include a folly on an island in a lake
-
A tale of two Reits – why performance matters for valuation
AEW UK and Regional are two Reits that are valued very differently, despite a shared focus on properties outside London
-
Healthcare stocks look cheap, but tread carefully
Shares in healthcare companies could get a shot in the arm if uncertainty over policy in the US wanes, but are they worth the risk?
-
The Palace of Westminster is falling down
The Palace of Westminster is in need of repair, but the bill is prohibitive, says Simon Wilson
-
'It’s time to buy British equities'
Opinion There is no better place to start investing in UK equities than with two of MoneyWeek’s favourite investment trusts, says Max King