DroneShield Ltd (ASX: DRO) shares have given investors a wild ride over the past year.
After reaching $6.71 in October, the counter-drone technology share is now trading around $2.17.
I think that reset has created a more appealing opportunity. Here are three reasons I would buy.
Image source: Getty Images
The valuation has become easier to justify
DroneShield remains a growth share, so investors should expect to pay more than they would for a mature industrial or defensive business.
According to CommSec consensus estimates, the company is expected to generate earnings per share of 2.6 cents in FY26, 4.3 cents in FY27, and 7.4 cents in FY28.
That puts the shares on price-to-earnings ratios of approximately 83 times FY26 earnings, 50 times FY27 earnings, and 29 times FY28 earnings.
The early multiples are high, but they fall quickly if DroneShield delivers the expected earnings growth. An FY28 multiple of around 29 times does not look excessive to me for a company whose earnings could almost triple between FY26 and FY28.
The share price could still fall if contract wins or earnings arrive more slowly than expected. Even so, investors are being asked to pay far less for the long-term opportunity than they were near the 52-week high.
Counter-drone demand could keep growing
DroneShield develops technology that helps military, government, law enforcement, and critical infrastructure customers detect, track, and respond to unwanted drones.
I think the need for those systems is becoming easier to understand.
Drones are now cheaper, more capable, and more widely available. They can be used for surveillance, smuggling, disruption, and attacks, creating security challenges across battlefields, airports, prisons, energy facilities, borders, and major public events.
DroneShield has spent years focusing on this market and offers portable, vehicle-mounted, and fixed-site systems. That specialist position could help it capture a growing share of customer spending as counter-drone protection becomes a more established part of defence and security budgets.
The company still competes with much larger defence groups, while government procurement can move slowly and produce uneven revenue. I would accept those uncertainties because I think the market itself has substantial room to expand.
Software could strengthen the business
Hardware currently generates most of DroneShield's revenue, and I expect equipment sales to remain central to its growth.
However, the company also has a major opportunity to earn more from software.
Counter-drone equipment needs to keep recognising new drone models, frequencies, and tactics. Customers may therefore require software updates, threat libraries, support, and ongoing improvements after the original system has been delivered.
That can extend the relationship beyond a single hardware purchase.
As the installed base grows, DroneShield could have more opportunities to sell software and services to existing customers. A larger recurring revenue contribution could make earnings more dependable and increase the value of each customer relationship.
I think this part of the story deserves more attention because it gives the company another way to grow alongside rising hardware demand.
Foolish takeaway
DroneShield still carries more uncertainty than an established ASX blue chip share, and I would keep the position measured.
The company needs to convert market demand into contracts, deliver equipment on time, expand its operations carefully, and meet ambitious earnings expectations.
At around $2.17, I think the potential reward has become more attractive. The counter-drone market is expanding, DroneShield has built a strong specialist position, and growing software revenue could improve the business over time.
Those three factors make DroneShield shares a buy for me today.
