DroneShield Ltd (ASX: DRO) shares are trading at $3.57 after falling 9.62% on Thursday. That leaves the stock a long way below its 52-week high of $6.71, raising an obvious question for investors looking at the pullback. Is this an opportunity?
After reviewing the company's latest fourth-quarter and FY25 update, I believe the answer is yes. I think the sell-off has more to do with expectations and short-term noise than any deterioration in the long-term story.
Here's why I'd buy DroneShield shares below $4.
A very large and expanding addressable market
The investment case for DroneShield starts with the problem it is trying to solve. The proliferation of drones and autonomous systems is no longer theoretical. It is already a reality across the military, government, critical infrastructure, airports, and, increasingly, civilian settings.
DroneShield operates in what is effectively a global counter-drone and electronic warfare market, with customers spanning defence forces, intelligence agencies, law enforcement, and infrastructure operators. Importantly, management has highlighted that the civilian sector could grow to account for up to half of revenue over the next five years, thereby meaningfully expanding the total addressable market.
This is not a niche opportunity tied to one conflict or region. It is a structural demand trend driven by technology becoming cheaper, more capable, and more widely available.
Sales pipeline has softened, but momentum remains
One of the reasons the shares reacted poorly this week was a decline in the reported sales pipeline compared to the previous update. That is worth acknowledging. A smaller pipeline can make investors nervous, particularly after a strong run in the share price last year.
However, I think it is important to look at this in context. DroneShield just delivered its second-highest revenue quarter on record, capped off a year with all-time record metrics, and now has committed revenues for 2026 of $95.6 million. At the start of 2025, committed revenue was negligible.
In other words, some of the pipeline has been converted into actual contracts. That is exactly what you want to see over time. While the pipeline will naturally fluctuate, the company continues to announce meaningful contract wins across Europe, Latin America, Asia Pacific, and other Western military customers.
SaaS growth is becoming a bigger part of the story
One of the most encouraging parts of the latest update was the growth in SaaS revenue. Quarterly SaaS revenue jumped 475% year-on-year to $4.6 million, and management expects this to keep rising.
This matters because DroneShield is deliberately shifting toward a model where software plays a larger role. As drone hardware becomes more open-ended and adaptable, software, command-and-control platforms, and ongoing subscriptions become increasingly valuable.
All new products are now expected to include one or more SaaS components, creating a more recurring, higher-quality revenue stream over time and helping smooth earnings.
Cash flow and balance sheet strength
Another point that I think gets overlooked during volatile trading sessions is cash flow. DroneShield generated operating cash flow of $7.7 million in the quarter and is targeting consistent operating cash flow positivity and profitability going forward.
The company ended the period with over $210 million in cash and no debt. That gives it the flexibility to continue investing in R&D, expand globally, and ride out short-term volatility without raising capital.
Foolish takeaway
DroneShield is not a low-risk stock. Revenues can be lumpy, sentiment can swing quickly, and expectations can move faster than fundamentals.
But at below $4, with the shares down sharply from their highs and at a discount to the peer group, I think the market is focusing too much on short-term pipeline movements and not enough on the bigger picture. A growing addressable market, accelerating SaaS revenues, strong contract momentum, and a very healthy balance sheet are not signs of a broken business.
For investors who understand the risks and are comfortable with volatility, I think DroneShield shares below $4 look like a compelling opportunity.
