Stock In Focus: Droneshield

0:29A listener production. been looking at, not necessarily a buyer or seller recommendation, just a bit of a rundown of the business. Maybe it's a company you've heard of, maybe you haven't. Maybe it's something new or maybe something in the news, but that is stocks in focus. Now, as I said, we're not going to give you a formal recommendation here, so just keep that in mind. The only thing I do need to let you know is the multifollower's license only to provide general financial advice. What does that mean? It means we can't tell you what you should do personally. We can say we think a company is good or bad, we like it, we don't like it, it's a buyer, it's not, but what we can't do is say whether or or not, it's right for you.

1:00So take it in that spirit. This is general advice only. Last thing I'll tell you as we kick off, just to make sure everyone's on the same page, is this is a point in time. This is being recorded at the very, very beginning of April. And so just be mindful of that. If you're watching or listening to this later on, things may have changed for the company. So what the views it expressed now are our best ideas, our best views, our best analysis at this point in time. Right. That's that out of the way. It's important, by the way. That's why on to the fun stuff. And I've got to say, today's company is a fascinating one.

1:32Before we do tell you which company it is, I want to introduce one of our key analysts and portfolio managers, Andrew Leggett. Andrew, good day. Hey, Scott. I'm looking forward to finally getting to be able to talk some stocks again. It's been a while. I know. It's been a very long time. If you've been around our YouTube channel or podcast, you'll know we used to do this. We are bringing it back. It's been a very, very long time coming. Mate, talk about topical, both in terms of share price movement, but frankly, with everything going on in the world, you're going to tell us about a company called DroneShield.

2:00And like many companies on the Australian Stock Exchange, it kind of says what it does on the tin. But tell us what exactly is DroneShield. So yeah, I'll use some jargon here and then I'll break it down. So DroneShield, it's a defense company. You can't get away from it. So as I said, it's a defense company. DroneShield, ASX code is DRO, by the way. what they do is they offer non-kinetic detection and defeat solutions for counter-unmanned aerial systems so there's a lot to unpack there but essentially what it does is it provides products that can both detect drones and defeat them through a means that doesn't involve blowing them up.

2:47And that's what non-kinetic means. Kinetic bullets, rockets, non-kinetic things, such as what DroneShield uses, which is jamming. So that is essentially in a nutshell what they do. And it's a really interesting kind of market at the moment that it's in, I think. We're seeing a lot of drone use reported, particularly in Russia and Ukraine. We're seeing, I was going to say the future of warfare, we've seen the present of warfare, but unmanned aircraft, unmanned systems, as you say, have been coming into more use for a while now. But the cheapness and availability of drones and the ability to power those up with all sorts of things is an incredible, I will say advance.

3:32Advance in technology, whether it's an advance for mankind in terms of warfare is probably a different question. But let's kind of break it down because obviously a business that people, and this has been hot and cold. Many people have been talking about it. The share price has been all over the place. The future, though, is going to be, we would presume, greater amounts of warfare being fought without the involvement of humans, at least directly in the combat zone itself, those more unmanned, as you say, systems. Tell us, what is the investment case for drones? We'll get to the Kong, by the way, in a sec.

4:01Excuse me. What is the investment case for drone shield? Well, you touched on a bunch of the really good themes there. Drones are not necessarily an advancement. There's far more advanced things that militaries are using these days, but it is an innovation and it's kind of, you know, we see that in Ukraine, which, you know, I think is arguably the world's first drone war. And it's becoming an increasing kind of area of focus, not just militaries, you know, also governments, law enforcement, commercial businesses as well. But we'll focus on the military first and then we'll get into the latter area.

4:39and the thing is drones are incredibly they're an incredibly difficult enemy because they're very small they're very quick they can move around and that makes them hard to both detect because they're quite small and fast and also defeat uh and they can also be operated in swarms that's something a lot of people might not but that is a you know when people are sending drones now they're not necessarily just going to send one they'll send you know five ten and you've got to now try and like defeat all of them at once that's a really difficult problem to overcome and then you've got the the cost and what it does it kind of like helps level the playing field a bit you know in that you've got this drone that might cost a thousand dollars and then you can take out using that thousand dollar drone assets of the other side that might be worth in the millions and the billions of dollars and also in some areas like in people like the u.s navy has used multi-million dollar missiles to destroy ten thousand dollar drones now even the u.s military can't keep up that kind of level of financial attrition on the battlefield.

6:01So this is a problem that militaries all over the world are using, and they're looking to Ukraine at the moment to kind of see the tactics on both the offense and defensive side. And going back to what DroneChill does, which is jamming technology, that is a core part of what is the layered approach that many experts are considering as the optimal approach, where you have different versions to take out drones depending on how far away. You don't just rely on one single bit of technology. So that's it from the military sense, but the threat of drones goes beyond just the field of war and now becoming an issue in civilian populated areas as well.

6:46And this could be examples such as when terrorists have used drones to take out oil fields or power plants, critical infrastructure. But also it could just be as benign as someone flying a drone too close to an airport, which has happened as well, which has caused delays because it's a risk to oncoming aircraft. You don't want to get a drone sucked up into a 747's engine. so this is the other part of the problem as well and it's slightly different in that you can't use a layered approach in populated areas because shooting rockets at drones when there's thousands of people underneath you going about their daily lives that's not an option so the non-kinetic kind of approaches to dealing with drones it's kind of a necessity in this part and drone shield has done that in the past they've been used in areas like the boston marathon the southeast asia games the world economic forum um so they've kind of got the they've got some runs on the board both on the battlefield because drone shield products are being used in ukraine at the moment and expertise in using it in a civilian setting.

8:07And this makes it, I think, a compelling kind of company because, firstly, it's not usual that an Australian company kind of can create this defense technology that is used and accepted around the world. You know, the defense primes, the Lockheed Martins and the like are usually the ones that kind of do that. but also this is kind of a product an area that might be a little bit on the kind of narrower side for a company of company that be and also train shield at least from what i've seen so far appears to be one of the few companies that are doing both the detection and defeat capability together other others in the market are either like focusing on one or the other so that makes it between the real world experience, which has not just proven its technology, but also allowed it to forge strong relationships with key stakeholders in that industry, but also that all-in-one solution, I think that makes it very compelling.

9:15And just to go back, this is a problem that is becoming increasingly important, both in war and it was only a few months ago that reports were going around America of drones just hovering around sensitive US military installations. And basically, the US military just said, there's nothing we can do about it. So this is a problem that is very current, very important. And DroneShield is one of the companies that is leading the way in this market. And not only has that led to them growing strongly, but also starting to knock on the door, I think, of sustainable profitability. So that's the that's the kind of overall investment thesis that I see for DroneChill.

9:55Nice. Thank you, mate. That's the pro column. Again, there's not a recommendation here, so just keep that in mind. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

10:10Lots of good stuff about the company. Let's do the cons. People are looking at it and thinking, hey, drones are a thing. War is a thing. This company has some technology. The market's probably going to grow. What are the cons? What are the downsides? What are the risks of an investment in a company within DroneShield? Well, as you know, there's always risks. So I'll start with straight the technology. War, military technology, it's always built on the same thing. Military one builds a form of technology that gives it an advantage. Military two builds something to try and overcome that. And we're also, yeah, the literal arms race.

10:46And this has been seen in the Ukraine as well, where even jamming technology has ebbed and flow in how effective it is because people have, both Ukraine and Russia have come up with ways to try and make jamming less effective. So that means drone shield's products could essentially become less effective in a battlefield if this continues and if they don't stay ahead of the curve and find new solutions and improve their technology. And if that happens, well, militaries of the world aren't known for their loyalty to products. They just want whatever is going to give them the best chance of winning.

11:25So if that's no longer drone shield technology, they'll go to something else. Next is regulatory risk. As a defense contractor, drone shield is limited to who it can sell products to. It can't just accept orders from anyone. It has to be, you know, you have to pick a side, essentially. The US does have particular power. There have been some sales of drone children in the past that have relied on US approval. That may not always be forthcoming. There's also, you know, especially when we look at things in the civilian area, this is still a kind of emerging area. There's still a lot of regulations that prevent such technology being used, at least in kind of, you know, a major setting.

12:10I think that's going to change, especially with at least one major drone manufacturer watering down protocols that would previously prevent it from flying in restricted or sensitive areas. So this is something that will have to be looked at and changed. But there are risks, especially with jamming technology, that it could unknowingly also jam other signals that you don't want jammed. If you're trying to deal with a drone near the airport, you don't want to accidentally cut off the communication between air traffic control and a plane coming into land, for example. So that's all things that kind of need to be worked out.

12:45there's no guarantee that drone shield solutions will be the one that gets to go ahead when regulators do make that that decision and that gets into the next risk which is the common one with every company competition there are a few companies in here and a lot of them have far more financial resources than drone shield does being a relatively small asx company some of these competitors are valued, you know, VC backed by Americans, valued in multiple billions of dollars and, you know, another funding around, another funding round away from getting another few billion dollars in the bank account.

13:26So those are the core business risks. There's obviously financial risks, you know, us being a small emerging company, it's been loss making for most of its history and kind of needs to keep growing and build scale if it wants to really be a valuable kind of business. I think it can be that, but it's not a certainty. So that's a snapshot of the risks. This is not a company that just has the yellow brick road ahead of it. There are some real challenges there. Yeah. And as the valuation risk you mentioned, it's not yet profitable and you're trying to work out how much to pay for that, how much eventually it will make in profitability.

14:02It's really, really hard to tell. So lots of good stuff about the company, some potential downsides, risks, things to be aware of. before you are going to invest in it. Mate, let's round this out. You've given a pretty compelling case for the business. You've also told us why things might not go well and some of those known unknowns, as Donald Rumsfeld might say, which is probably appropriate given the military context. Tell us about your view on DroneShield. What do we reckon the odds are of it being market beating over the long term from here? So at the moment, I think when we record this, I think its share price is just under a dollar per share.

14:34So at this, and that's always something you've got to take into consideration because even the greatest company in the world is not going to beat the market if you pay a ridiculous price for it. I think it can, but I will kind of add a bit of conservatism there in that, you know, yes, it has a lot of big macro themes going for it. And I think it's shown a good track record in being able to kind of take, you know, part of that market. So that's going to be what drives it to being an outperforming investment in the future. But in saying that, it's not a sure thing. And even if it does achieve that long-term market beating result, it's probably going to be an extremely rocky ride.

15:23It was only last June, I think, that DroneShield shares were at$2 a share. And now they're at$1 and it's been lower than that just recently. This is a company whose share price, there's a lot of sentiment in it. And as such, it's a roller coaster. And that means it might be a little bit too much of a wild ride for some people. Yeah. And that's something to also consider when thinking about DroneShield. There you have it. Andrew Leggett bringing you a stock in focus. DroneShield, DRO is the ASX code. We're back. We're back for our second round of Stocks in Focus. We tend to do this regularly. So if you've just stumbled onto this one, please make sure you like and subscribe if you're watching on YouTube.

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16:39We've got what I've been reading. We've got lots of really, really good stuff. So do subscribe to those for me if you wouldn't mind. Thanks for watching. Thanks for listening. Andrew, thank you for your expertise. And until the next one, fool on. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services Licence 400691.