DroneShield Ltd (ASX: DRO) shares had a tough session on Wednesday.
The counter drone technology company's shares sank 10% to $3.20.
This followed the release of its half year results for FY 2025.
Is this an opportunity for investors to buy this fast-growing stock? Let's find out.
Are DroneShield shares a strong buy?
Before we tackle that question, let's take a look at what the team at Bell Potter thought of its performance during the first half.
Bell Potter acknowledges that DroneShield's gross margin was softer than expected, which led to a miss on its earnings. However, this was due to lower margin third party tech. It said:
DRO 1H25 revenue of $72.3m was pre-released in July and reflected growth of 210% vs the pcp. The drop in gross margin (65.4%) was a miss to BPe (70.0%) and driven by a larger proportion of system integration contracts, which include third party tech at lower margin. EBITDA of $5.2m was slightly below BPe ($5.7m) with the lower gross margin offset by lower operating expenses than we forecast, whilst the miss at NPAT ($2.1m) was more significant (BPe $3.9m) due to an outsized tax expense (-$3.1m vs BPe -$1.6m). DRO recorded an operating cash outflow of -$8.7m and had a cash balance (including term deposits) of $203.8m.
But perhaps the biggest disappointment was external news that Leidos Australia has been named as the System Integration Partner (SIP) of the Land156 program. This could have been very lucrative for DroneShield had it been named as SIP. It said:
In a disappointing update, Leidos Australia was announced as the System Integration Partner (SIP) of the Land156 program. Despite not being part of Leidos bid, we would anticipate DRO to still contribute to the program, albeit in a smaller role. This is supported by the government announcement, which stated "the open architecture approach to the project means more companies can be integrated in the future."
Buy the dip?
Despite the above, Bell Potter remains very positive on DroneShield and sees plenty of value in its shares at current levels.
According to the note, the broker has retained its buy rating on its shares with a trimmed price target of $3.70 (from $3.80).
Based on its current share price, this implies potential upside of approximately 16% for investors over the next 12 months.
Commenting on its buy recommendation, the broker concludes:
DRO's 1H25 performance demonstrates the significant growth that has occurred in the business in CY25, including the acceleration of both the scale and frequency of contracts. Whilst the Land156 update is disappointing, Australia represents <5% of DRO's $2.3b sales pipeline and the program was not included in our forecasts due to insufficient details regarding the structure and size of the program.
