DroneShield Ltd (ASX: DRO) shares have been on a wild ride in recent weeks.
After peaking as high as $2.72 in the middle of last month, the counter drone technology company's shares lost over half of their value.
This leaves them trading at $1.01 at the time of writing.
Is this a buying opportunity for investors? Let's see what Bell Potter is saying about the popular company.
Are DroneShield shares a buy?
According to a note out of Bell Potter this morning, its analysts think that now is the time to snap up the company's shares.
The note reveals that the broker has upgraded DroneShield's shares to a buy rating (from hold) with a reduced price target of $1.25 (from $1.60).
Based on its current share price, this implies potential upside of almost 24% for investors over the next 12 months.
What is the broker saying?
Bell Potter points out that the company has just completed another capital raising. It believes this leaves DroneShield well-positioned to maintain its market leading position. It explains:
DroneShield has successfully completed a $120m fully underwritten placement, the purpose of which was to fund a significant R&D program into greater application of Artificial intelligence in next-generation DroneShield products. DRO has recognised the technological landscape is changing quickly and the company needs to expand its product offering to combat the rapid advancement of drones in order to maintain its market leading position. Specifically, the company intends to invest $90m in R&D, $20m in potential strategic bolt-on acquisitions, with the balance to cover the offer costs and further working capital.
In response to the above, the broker has updated its earnings estimates for the company. This reflects dilution from the capital raising and higher than expected expenses. It adds:
We have increased the operating expenses throughout the forecast period based on the significant scaling of the software engineering team, which naturally places downward pressure on our EBITDA estimates and delays our forecast margin expansion until CY26. We now forecast EBITDA margins of 22%, 23% and 33% in CY24, CY25 and CY26, respectively. Our EPS changes are -23%/-36%/-19% in CY24/CY25/CY26 based on the dilutive effect of the equity raise and downgrades to our EBITDA forecasts.
Time to buy
Overall, Bell Potter believes that the future is bright for DroneShield and sees a lot of value in its shares following recent weakness. It concludes:
DroneShield is now well positioned to not only capitalise on short-term market demand but also entrench itself as the long-term market leader. Based on a sales pipeline of >$1.1b and a contracted order backlog of $28m, we anticipate the company will have a significantly stronger 2H and we remain comfortable with our full-year revenue forecasts. Despite the reduction in our target price, the recent share price decline provides an attractive point of entry, so we upgrade our recommendation to BUY.
