This Drone Stock Appears to Be Low-Hanging Fruit
Although we had a slightly hot personal consumption expenditure inflation report on Wednesday morning, the indexes are mildly positive and breadth is slightly negative. The Magnificent Seven tech stocks are seeing a boost from news that Meta ($META) settled the lawsuit brought by 29 states over the harm its platforms allegedly cause children. The company will pay approximately $18 billion and agreed to changes including daily time limits and nighttime blocks for teen users. The stock is higher because the settlement caps a risk that had no ceiling, and it came mid-trial before Mark Zuckerberg was due to testify.
Other than that the action is random and slow as investors await the Nvidia ($NVDA) report after the close. My list of stocks moving up more than 10% is only about 18 names, which is unusually short.
As I have been discussing, my game plan recently is a more defensive posture with higher levels of cash as we deal with seasonality and few positive catalysts. I am not overtly bearish, but I do not see any reason to rush into larger positions.
What I am focused on is my shopping list. So far I highlighted Hinge Health ($HNGE) on Monday and National Energy Services Reunited ($NESR) on Tuesday. Last week I mentioned Amazon ($AMZN) as a name I was looking to buy on weakness. Today I want to focus on a drone play with enormous revenue growth.
Ondas Holdings
Ondas Holdings ($ONDS) builds military and commercial drones. It also builds the systems that spot and shoot down hostile drones, along with the industrial wireless networks that connect them.
The company began as a small operation selling radio networks to railroads and bought its way into defense through a series of acquisitions, adding DZYNE and Cyberhawk this summer. Last week it agreed to buy Aran Defense in Israel. The customer list now includes a U.S. Army program with a ceiling near $982 million, and Ondas was selected to build Israel’s next generation of tactical attack drones.
Revenue growth is the story and the main reason I like the stock. Ondas did about $50 million in sales for all of last year. It did $83.8 million in the second quarter alone, 13-times the year-ago quarter and 67% above the first quarter, and it handily beat the consensus estimate. Organic growth, with the acquisitions stripped out, ran 85%.
Orders were $175 million in the quarter with an additional $105 million already booked in the current one, and backlog stands at $613 million, closer to $757 million with the acquisitions included. Management guided the current quarter to $140 million to $155 million, nearly double what it just reported, and raised the full-year outlook to $525 million to $550 million, more than 10-times last year’s revenue.
The company still loses money at the operating level, with an adjusted earnings before interest, taxes, depreciation, and amortization loss of about $50 million in the quarter, but management says the operating businesses will turn positive in the fourth quarter and the whole company by the end of 2027. With roughly $1.4 billion in cash and investments there is no immediate need for a secondary offering.
The Shorts Are Leaning Hard
The bears are focused on a share count that has climbed steadily as acquisitions were paid for in stock, and they have been aggressive about pressing the position. According to reports, about 41% of the float is sold short.
That is an enormous bet against a company guiding to a tenfold increase in revenue, and it cuts both ways. Heavy short selling is part of why the stock has been unable to hold a rally since the report. It is also fuel when good news hits.
If the third quarter delivers the near-doubling management guided to, the shorts have to buy back a stock that is already thin, and the crowd leaning on it at $8 becomes the crowd chasing it higher. I do not buy a stock because it has a big short position, but when the fundamentals are moving this fast, a crowded short is a reason the move can be bigger than the news.
Drifting Back to the 50-Day
The stock topped near $15 in June, was cut in half by early August, and built a base around $8. It ran to nearly $10 into the report, popped and reversed on the day, and has drifted lower since. On Wednesday morning, it sits at the 50-day moving average around $8.20.
TipRanks shows seven Buy ratings with an average target of $19.68. Ladenburg Thalmann raised its target to $22.75 after the quarter and Oppenheimer went to $18.
I am long the stock and, as with all my positions, I trade around a core. This current pullback is where I start looking for adds. I will make partial buys against the 50-day and add on a deeper pullback toward the $8 base low. If $8 goes on volume, the story is intact, but the risk is not, and I may lighten the trading position and let the market settle before pressing again.
The third-quarter report in November is the test of whether the backlog converts into revenue on schedule, and I want to be built up before then.
I will have more on the shopping list tomorrow.
At the time of publication, DePorre was long ONDS, AMZN, NESR.
