Share markets are skittish beasts at the best of times, but after the menacing gymnastic performance put on by the share price of embattled defence stock, Droneshield (ASX: DRO), the market is left with one seemingly unanswered question: Have the stock’s fundamentals - aka its core business – materially changed?
Given that management is obliged to update the market in real-time if they have – the radio silence from the company on this front suggests they haven’t.
Assuming that is the case, the other overarching question shareholders are left with is what’s the real reason why three insiders – management with major holdings in the stock – decided, albeit unbeknownst to each other, to successively offload their holdings?
What the heck happened?
Let’s retrace some recent developments.
Droneshield has been on a tear since early June and, following a string of new and weighty contracts, rallied fivefold from $1.30 on 2 June to $6.68 on 9 October.
However, since then, the share price has been in freefall, giving back virtually all of those previous gains after fessing up to issuing the latest contract update twice.
In isolation, that mistake should have been relatively easy for the market to swallow and move on from - these things happen.
However, what turbocharged the market’s suspicions that the recent communication blunder is directly linked to the aforementioned selldowns by the CEO, chairman and a third director.
Admittedly, management offloads stock all the time, but it was the magnitude of those sell-downs in the wake of that communications blunder that made the market smell a rat.
After all, these sell-downs weren’t just a trimming of the sails.
Collectively, they amounted to a whopping $70 million of stock and appeared to have an errant disregard for the impact it would have on the share price, which dropped 30% in one day.
US CEO bails out
However, just when the worst of Droneshield’s dark days appeared to be behind it, the company dropped the bombshell that the CEO of its U.S. division, Matt McCrann, after three years in the role, was running for the exit.
McCrann’s departure came 10 days after the company mistakenly announced to the ASX that it had secured $7.6 million in contracts with the U.S. government, only to later withdraw the announcement as a double-up.
If you were looking for a masterclass in how a seemingly good stock – riding the sweet spot of market popularity – could rapidly unravel its market value and display uncanny disregard for its shareholders – this would be it.
To put the company’s recent antics into perspective, the one-time ASX hero, which until only days ago looked well on its way to being the share market’s next 10-bagger, now appears to be trading closer to fair value at $1.89.
What doesn’t the market know?
What’s clearly adding to investor uncertainty about the stock is the lingering fear that there’s still another shoe left to drop in the unravelling of the stock’s long-term growth story.
While there’s some talk that the constantly evolving nature of warfare in Ukraine has negative consequences for the DroneShield narrative, the company’s CEO, Oleg Vornik, remains adamant that radio frequencies will remain the core sensor technology – even as drones continue to evolve.
While the company refuses to comment publicly about the performance of its equipment – citing sensitivities of operating in the defence sector – it has been quick to rest on its former laurels.
Vornik noted that growth in revenue from its products, including drone guns, had increased 11 times year-on-year, which suggests products are meeting customer expectations.
“Additionally, we have an engineering team of over 330 staff, which continuously works on improvements to existing tech, and the next generation of products, which we are excited about,” Vornik said.
Laggard in the R&D stakes
Past performance aside, there is also growing speculation that Droneshield’s underinvestment in R&D – relative to some of its peers – will dilute its competitive advantage moving forward.
For example, the Sydney-based company spent $19.6 million on product development in the six months to June 30, on top of $21.8 million in the previous full year to 31 December, 2024.
By comparison, the US$42 billion ($65 billion) taser maker Axon, which acquired DroneShield rival DeDrone, invested US$441.6 million on R&D last year across its product range, which also included police body cameras and software.
Insiders out
Given that markets like what are called ‘insider-companies’ - where management has some serious skin in the game – the decision by Droneshield founder Vornik to sell every one of his shares in the company for around $50 million, without any explanation as to why, is a seriously bad look.
Vornik’s sell-down was followed by chairman Peter James offloading a $12.35 million stake, while Jethro Marks, another director, sold some $4.89 million in the stock.
What’s equally incriminating is that Vornik didn’t bother to offer the market an explanation for McCrann’s resignation, which was effective immediately.
Meantime, brokers remain confused over what Droneshield is really worth.
While Bell Potter most recently reaffirmed its forecasts that shares were headed to $5.30 over the year, Morningstar puts the stock’s fair value closer to $2.31.
One thing is for sure: Institutional investors aren’t waiting around to find out.
DroneShield has a market cap of $1.7 billion; the share price is up 150% in one year and down 42% in the last week.
Hold onto your hats, the next missive from Droneshield to the market has the makings of a doozy.
While broker downgrades on Droneshield may appear too little too late, they do appear inevitable.
The stock’s shares are in a downtrend confirmed within multiple periods.
Consensus is Strong Buy.
This article does not constitute financial or product advice. You should consider independent advice before making financial decisions.