DroneShield Ltd (ASX: DRO) shares have been seriously battered over the past three weeks.
In a welcome turnaround today, shares in the All Ordinaries Index (ASX: XAO) drone defence stock are surging 5.4%, currently trading for $1.08 apiece.
Still, it was only on 15 July that DroneShield stock closed at $2.60. That sees the stock down 48.5% in less than one month.
Despite that painful retrace the company remains one of the top performing stocks on the ASX.
As you can see on the chart above, DroneShield shares are still up more than 233% since this time last year.
So, you don't have to feel too badly for longer-term shareholders.
As for investors wishing to add to their holdings or buy the stock for the first time, there's a bright side to this story.
Why the plunge in DroneShield shares isn't all bad news
No one likes to see their investment fall by 49% in less than a month. Even if they are still sitting on outsized longer-term gains.
But to be fair, the meteoric rise in DroneShield shares (on 15 July, the ASX defence stock was up an eye-watering 863% over the past 12 months) was never going to be sustainable.
Before the recent pullback, the company commanded a market cap of $2 billion, which, a few analysts pointed out, well-exceeded its nearer-term earnings prospects, strong growth or not.
That analysis started the initial wave of selling, with the stock coming under additional selling pressure after management launched a capital raising.
After entering a trading halt last Wednesday, the stock recommenced trading on Thursday. That's when management announced the completion of a $120 million underwritten placement, which was solely open to institutional and sophisticated investors.
New shares were issued for $1.15 apiece, 17.3% below the closing price before the stock entered a trading halt.
Investors responded by sending DroneShield shares down 5.4% on the day. Caught up in the broader global stock market sell-off, the ASX defence stock plunged 14.8% on Thursday, 3.8% on Friday, and another 10.1% on Monday.
What's all this about a silver lining?
Despite the immediate dilutive impact of the capital raising, DroneShield may have timed this just right. With history as our guide, we know that raising capital when both Australia and the United States may be heading into a recession is a lot more difficult.
Post that capital raise, DroneShield has a strong balance sheet, which management intends to deploy to fund research and development in artificial intelligence (AI), fund strategic technology acquisitions and spur rapid growth.
Indeed, with tensions simmering in hot spots across the globe, the demand for AI-enabled drone defence systems is likely to continue growing alongside the increased use of hostile drones.
Commenting on the outlook for DroneShield shares post the capital raise, CEO Oleg Vornik noted:
This favourably positions DroneShield to fuel its revenue growth and further increase its margins, due to anticipated increase in AI SaaS offerings and higher sales pricing for the underlying hardware, as the C-UxS market continues to rapidly grow, supported by the current tailwinds through drones being used extensively for nefarious purposes globally.
