This Drone Stock Appears to Be Low-Hanging Fruit
As we get big news from the Meta case and await Nvidia earnings, here’s a company I’m adding to my shopping list.
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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.
