A Once Successful Event Driven Trade: Red Cat Holdings, Looks Attractive

Red Cat Holdings was an event driven trade I was in based off of the fact that I had conviction that they were gonna win the U.S Army Short Range Renaissance Program. They announced they won the contract and although the contract is for 5,880 systems over the next 5 years at a total value of around $260 Million, the stock didn’t move until their townhall started later that evening.

I won’t go too in-depth on the contract as WSJ put an article out about it;

The stock is now trading at $7.83 and peaked at around $11.70, although I do think it caught some drift off of the market sell off this afternoon when the Fed cut rates for the third time in the past 4 months. The stock sold off after earnings of;

GAAP EPS of $0.18 vs. expectations of $0.09

Revenue of $1.53 Million vs. expectations of $4.13 million

I think the stock looks really attractive here but investors are waiting until we see some more substance that come from something other than the SRR contract, $RCAT has shown that they’ve shifted their focus to long-term growth over short-term sales and the trade off is a 60% drop in revenues YoY, a gross margin of -1.5% versus 30% last year, and a 150% drop in net income YoY. Not to be confused with the massive long term play this could be I think you could benefit from averaging in at these prices with the negative sentiment around the stock. The short interest continues to rise, now hitting almost 7% of shares afloat. I think that investors will regret shorting this as once big news hits, the stock always shows that it has a lot of momentum behind it and could bid higher with investors covering their shorts.

They’ve partnered with Palantir to are their drones with Palantir’s visual navigation and investors are loving drone stocks at the moment. Red Cat’s Black Widow drones will now feature Palantir’s warp speed, their manufacturing OS that allows for advanced speed, flexibility, and security. I think what’s important about this is that the Warp Speed adapts to to Red Cat’s Black Widow, they won’t have to change their design to be able to implement it. This implementation will be key in equipping drones that are lacking situational awareness in GPS-compromised environments, enabling them with accurate navigation without reliance on radio signals or GPS.

The Palantir contract will help increase margins by adding high-margin software to the company’s drones. While hardware alone achieves around 50% gross margins, integrating Palantir’s AI-powered software, like real-time navigation, brings in 80–90% margins on additional revenue per unit, significantly boosting overall profitability. This positions $RCAT to scale more efficiently and reach cash flow profitability faster.

One thing that I think investors aren’t pricing is the trade barrier that Trump could unleash on China, and since Red Cat is an American-made drone, they should benefit from this tailwind. The new administration’s push to build the largest drone and robot army focused on cost-effective and highly capable options, is a big opportunity for Red Cat. Being an American-made drone company, Red Cat stands to gain from potential trade barriers on Chinese drones and the broader push to bring U.S. manufacturing back.

Another is their financial stability; they raised $8 million in debt and that will help them get to early 2025, or until they start receiving the funds for the large production contracts.

They gave guidance of $80-$120 million in revenue for calendar year 2025 and have a focus on scaling production for the SRR program. CEO Jeff Thompson had this to say about the guidance, “Well, that’s actually a good question. So we did give guidance of $80 million to $120 million. That does not include any additional revenue on each Black Widow drone that will probably, I think, I don’t think anyone’s not going to want to take this software.”

I think their biggest strength, defense contracts, is also their biggest risk as the stock ran up from $4 to $11 after they won the SRR contract but has struggled to stay afloat since without headline news holding it up. They need to prove they can hang with the big dogs of the industry (Anduril, Skydio) and continue to show consistent financial performance and 2025 is the prime year for them to do thatI think that in the long run this could be a massive play and that $RCAT is a prime acquisition target once they prove that the SRR contract wasn’t a fluke.