Droneshield Ltd (ASX: DRO) shares have fallen sharply over the past fortnight. After last year's explosive rally, investor confidence now appears to be fading.
The share price is down almost 20% over the past week and has dropped another 7.18% to $3.23 today. That leaves the stock down roughly 27% from its late January highs near $4.50, and only about 6% higher for the year.
Let's take a closer look at whether this is just a temporary pullback or the start of a deeper downtrend.
Why the quarterly update disappointed the market
The selling pressure intensified after Droneshield released its fourth-quarter update on 27 January.
While management again highlighted strong long-term demand for counter-drone technology, the update brought few surprises on the financial front.
Cash receipts remained modest, contract momentum stalled, and revenue growth showed little sign of improvement.
At the same time, operating costs stayed elevated as the company continues to invest heavily in expansion. Free cash flow remained negative, reinforcing concerns that profitability is still some distance away.
Overall, the update did little to support the stock's premium valuation, prompting investors to start taking profits after a strong run.
Valuation pressure is hard to ignore
Even after the recent sell-off, Droneshield's valuation still looks stretched.
At the current share price, the company has a market capitalisation of roughly $3 billion. That compares with annual revenue of around $100 million, based on its recent disclosures.
Investors are still valuing Droneshield at close to 30 times its annual sales, a very high price for a business that is not yet profitable and continues to spend heavily to grow.
The sell-off is starting to bite
The technical picture has also deteriorated.
The share price has broken below several short-term moving averages, and momentum indicators continue to weaken. The relative strength index (RSI) has fallen into the low 40s, suggesting sellers remain in control rather than buyers stepping in aggressively.
The $3 level now looks like a key line in the sand. If that support fails, there is limited technical protection until the $2.50 to $2.70 range, where the stock last found sustained buying interest.
On the upside, the former support zone around $3.80 to $4 has now become a clear ceiling, meaning rallies may struggle to gain traction.
Foolish bottom line
Droneshield is positioned in a growing defence niche, but the recent share price weakness shows the market is becoming more demanding.
With a $3 billion valuation, relatively modest current sales, and ongoing cash burn, investors are now looking for clearer proof that growth is accelerating.
If meaningful contract wins and stronger revenue momentum do not emerge, the recent sell-off may turn into a broader reset rather than a short-term pullback.
