DroneShield Ltd (ASX: DRO) shares were out of form again on Monday and sank deep into the red.
The counter drone technology company's shares dropped 21% to end the session at $1.55.
This latest decline means that its shares are now down 43% from last week's 52-week high of $2.72.
Why did DroneShield shares tumble on Monday?
Investors were hitting the sell button yesterday after the company released its second quarter and half year update.
Although DroneShield reported meteoric growth during the first half, its revenue growth slowed markedly in the second quarter.
DroneShield achieved record revenue of $24.1 million for the six months ended 30 June. This represents a 110% on the prior corresponding period. However, the majority of this revenue was generated in the first quarter. For example, first quarter revenue came in at $16.7 million and second quarter revenue came in over 50% lower at $7.4 million.
Given its lofty valuation, it seems that some investors had been pricing in much stronger revenue in the second quarter. And with that not materialising, they were quick to hit the sell button.
Broker reaction
Analysts at Bell Potter have been busy running the rule over the company's update. They note that its first half performance was short of expectations:
DroneShield released its Appendix 4C and Q2 update, which demonstrated continued growth in its core business but was below our 1H expectations. The company delivered record 1H revenue of $24.1m, which was +110% on 1H23 but represented a Q-o-Q fall and was below our expectations of ~$30m.
However, despite this, the broker has increased its long term estimates to reflect its larger sales pipeline. It said:
We have upgraded our revenue forecasts from CY25 onwards based on near-term defence opportunities in the increased sales pipeline and longer-term civilian applications. We now forecast revenue of $129.2m/$162.9m in CY25/CY26 and our EPS forecasts are 4.5c/6.2c. The operating leverage in the business, driven by high gross margins (+70%) and a relatively fixed cost base, will see significant bottom line earnings growth on any upside to our current revenue forecasts.
Shares downgraded
While the above isn't enough for Bell Potter to continue recommending DroneShield shares as a buy, it does believe they have bottomed now.
According to the note, the broker has downgraded its shares to a hold rating (from buy) with an improved price target of $1.60 (from $1.00). This is broadly in line with where DroneShield shares ended yesterday's session.
Bell Potter summarises its downgrade as follows:
Our long-term view of DroneShield remains unchanged, we view the company as a market leader in the still immature counter-drone market and one who will continue to benefit from substantial tailwinds in the defence sector. The company continues to be an attractive vehicle for exposure to popular investment themes, including geopolitical tensions, increasing use of drones and the rise of AI. However, at its current valuation DRO will attract increased scrutiny over its short-term performance and future contract announcements, thus we anticipate continued share price volatility. On this basis, we have downgraded our recommendation to HOLD as we await further evidence of pipeline conversion in the 2H or a more attractive entry point.
