DroneShield Ltd (ASX: DRO) shares are taking another beating today.
In an unusual sell-off for the high-flying All Ordinaries Index (ASX: XAO) drone defence stock, shares closed down a precipitous 22.2% yesterday trading for $2.02 apiece.
That came on the heels of Monday's 11.1% surge, which saw DroneShield shares surge to an all-time closing high of $2.60.
Today, the selling action continues, with the stock down 18.8% at $1.64 a share.
As the above chart shows (if you look closely), shares in the ASX drone defence company have been sold off for the past two days, sending them down 37%.
However, even after that big fall, shares remain up 335% so far in 2024.
Here's what's happening.
Why has the ASX drone defence come under pressure?
As Motley Fool analyst Sebastian Bowen reported, the big selldown in DroneShield shares appears to be driven by an article published before market open on Tuesday questioning the company's high valuation.
The Capital Brief article noted that at Monday's $2.60 a share, DroneShield commanded a market cap of $1.98 billion.
Rodney Forrest, director of Sublime Funds Management, was quoted as saying, "Its valuation is wild."
DroneShield responded to an ASX price query, citing the article as the likely reason for the pressure on its shares.
The company noted that article included the following:
- Share price performance over the recent period
- Comparison of DRO's market cap to several large companies across different industries in the Australian market
- Statements by two fund managers on their opinion of DRO's valuation being overheated
- Statements from two stock analysts on their outlook for DRO
- A brief summary of DRO's business
- Reference to DRO being a popularly traded stock on several broker platforms
- A historical sale of DRO's shares held by one of DRO's directors, Jethro Marks.
Management added, "There is no new information or change of circumstance around the business" that should impact DroneShield's share performance.
Time to pounce on DroneShield shares?
To gauge the past two days of selling, it's important to look at the bigger picture.
On Monday, when DroneShield shares closed at $2.60, the stock was up 863% over 12 months. Yep, a year ago, you could have bought shares for just 27 cents a pop.
Like Icarus, then, the drone defence stock may have flown too high, too fast.
Unlike Icarus, though, I don't imagine the share price is going to plunge into the sea.
The negative market reaction appears more related to short-term opportunism to make a quick buck, shorting the stock rather than any longer-term fundamental retreat from the company's strong growth prospects.
The rapid growth of potentially hostile drones is extremely unlikely to abate in the foreseeable future. And the AI revolution will only galvanize this trend. This means that the demand for rugged, effective counterdrone measures is also likely to keep growing apace.
This is a trend we've already seen playing out with recent growth metrics in DroneShield shares.
The company recently achieved record first-quarter revenues of $16.4 million, a 10-fold increase (900%) from the prior corresponding quarter.
At the end of April, DroneShield had a $27 million contracted backlog with a sales pipeline of more than $519 million.
So, is it time to pounce?
While shares could certainly still slide further from here over the near term, I believe that following the 37% two-day sell-down, long-term investors will likely look back at today's $1.64 a share as a bargain entry point.
