Puerto Rico-based Red Cat Holdings, Inc. (RCAT) provides products, services, and solutions to the drone industry through its five subsidiaries: Teal Drones, Fat Shark Holdings, Rotor Riot, Skypersonic, and Red Cat Propware. The company made its stock market debut on April 30, 2021, and has received several contracts. Skypersonic was awarded a five-year contract with NASA on September 27. Also, Teal Drones was awarded a firm-fixed-price, multiple-award blanket purchase agreement (BPA) by the United States Customs and Border Protection on December 22, which helped the stock soar in price after hitting its 52-week low of $1.78 on December 21.

However, the stock has declined 41.7% in price over the past three months and 1.9% over the past month to close yesterday’s trading session at $2.21.

In July, RCAT closed a $60 million public offering of its shares. The company is expected to use the proceeds to provide funding for services, sales, and marketing efforts for its Red Cat Drone Services, strategic acquisitions, related expenses, and general working capital. However, the stock issue could lead to share dilution. Also, the company reported losses in the last quarter. So, RCAT’s near-term prospects look bleak.

Here is what could shape RCAT’s performance in the near term:

Adverse Impact of Growing U.S.-China Tensions

According to the prospectus filed by RCAT on April 30, it obtains components for its drones from a limited number of suppliers, primarily from China. But China has been engaged in a trade war with the United States over the past few years, and RCAT does not have long-term agreements with these suppliers that obligates them to sell components to it. So, its reliance on these suppliers entails significant risks and uncertainties.

In July 2021, the Biden administration blamed China for the hacking activities that exploited Microsoft's email software. And China’s Personal Information Protection Law (PIPL) came into effect on November 1, 2021, outlining data processing requirements for companies outside China, including passing a security assessment conducted by state authorities. According to a Bloomberg report, drones took center stage amid the U.S.-China war on data harvesting. So, RCAT’s operations could be hurt by the growing tension between the world’s two largest economies.

Increased Competition

RCAT faces intense competition with established and well-known diversified consumer electronics manufacturers, such as Samsung Electronics Co. and Sony Group Corporation (SONY), and software and other products companies, such as Microsoft Corporation (MSFT). It also competes with additional established, well-known First Person View (FPV) drone manufacturers, such as Seiko Epson Corporation (SEKEY) and MicroLED.

Top Line Growth Does Not Translate into Bottom Line Improvement

For its fiscal second quarter, ended October 31, 2021, RCAT’s revenues increased 335.5% year-over-year to $1.86 million. However, its operating expenses increased 394.6% year-over-year to $2.91 million. And its operating loss came in at $2.76 million, representing a 463.4% year-over-year rise, while its net loss increased 279.4% year-over-year to $2.74 million. Also, its loss per share was $0.05 compared to $0.04 in the year-ago period.

POWR Ratings Reflect Bleak Prospects

RCAT has an overall F rating, which equates to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. RCAT has an F grade for Quality, which is in sync with its low profitability.

It has an F grade for Stability, given its highly volatile nature compared to the market.

RCAT is ranked #160 of 169 stocks in the Software – Application industry. Also, click here to see the additional POWR Ratings for RCAT (Growth, Value, Momentum, and Sentiment).

Click here to check out our Software Industry Report

Bottom Line

RCAT has been awarded several contracts over the past few months and has made several acquisitions. However, its stock is currently trading below its 50-day and 200-day moving averages of $2.42 and $3.10, respectively, indicating a downtrend. Moreover, it could keep losing with U.S.–China tensions impacting its operations. So, we think it could be wise to avoid the stock now.

How Does Red Cat Holdings (RCAT) Stack Up Against its Peers?

While RCAT has an overall POWR Rating of F, one might want to consider investing in A-rated (Strong Buy) Software - Application stocks, such as Commvault Systems, Inc. (CVLT), Open Text Corporation (OTEX), and eGain Corporation (EGAN).

RCAT shares fell $0.13 (-5.88%) in premarket trading Wednesday. Year-to-date, RCAT has declined -26.33%, versus a 29.25% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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