Are DroneShield shares worth buying and holding?

I think DroneShield has a big opportunity, but investors need to be comfortable with the risk.

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DroneShield Ltd (ASX: DRO) has become one of the ASX's most closely watched growth shares.

The opportunity is substantial, but this is still a company where investors need to be comfortable with plenty of uncertainty along the way.

So, would I buy the shares and hold them for the long term?

A silhouette shot of a man holding a control in his hands and watching as a drone hovers overhead with sunrays coming from the sky.

Image source: Getty Images

Counter-drone technology has become increasingly important

The first reason I am positive on DroneShield is the problem it is trying to solve.

Small drones are now being used extensively in modern conflicts, while governments are also thinking more seriously about protecting airports, military bases, critical infrastructure, and other sensitive locations.

That creates demand for technology that can detect drones quickly and, when appropriate, stop them.

DroneShield specialises in this area. Its products use radio-frequency sensing, artificial intelligence, electronic warfare, and other technology to identify and respond to drone threats.

I think its focus is an important strength.

DroneShield has spent years developing specifically for the counter-drone market rather than treating it as a small part of a much larger defence business. I think that experience could become increasingly valuable as customers look for technology that has already been tested and can continue adapting as drones change.

The technology keeps moving forward

Another reason I would be comfortable holding DroneShield is that the company is not relying on one successful product.

Drone threats are changing quickly. New drones can use unfamiliar frequencies, move faster, and try to avoid existing detection methods.

DroneShield has been responding with regular software and hardware development. Its recently released RfAI-3 technology is designed to identify previously unseen drones rather than depending entirely on a catalogue of known signals.

It has also recently launched RfRecon, a portable system that helps military and security users understand activity across the radio-frequency environment.

I like this because it shows the opportunity extends beyond simply selling more of the same equipment.

If DroneShield can keep improving the technology already deployed with customers while developing new products around their needs, it could build much deeper relationships over time.

It is preparing for a much larger business

Manufacturing is another part of the story I think investors should watch closely.

There is little value in winning major defence orders if a company cannot produce enough equipment to fill them.

DroneShield has been investing heavily to increase its manufacturing capability in Australia, while also establishing production in Europe. Its first European-produced counter-drone system came off the production line earlier this year.

That gives the company more capacity to pursue larger programs while also bringing production closer to important overseas customers.

For me, that is an encouraging sign that management is building the business for a much greater level of demand than it has historically served.

I would still treat this as a high-risk investment

This is where I would be careful.

Defence orders can be large and unpredictable, procurement processes can take time, and future revenue may not arrive smoothly from one period to the next.

Competition is another consideration. The counter-drone opportunity is attracting major defence companies and specialist technology businesses around the world.

DroneShield also needs to keep investing rapidly enough to stay ahead as drone technology evolves.

That means I would be much more comfortable holding DroneShield as a relatively small part of a diversified portfolio than making it one of my largest investments.

Foolish takeaway

For an investor with a high tolerance for risk, I think DroneShield shares are worth buying and holding.

What keeps me interested is the possibility that counter-drone technology becomes a much larger and more permanent part of defence and security spending around the world.

DroneShield has already spent years developing specialist technology and is now building the manufacturing footprint needed to compete for bigger opportunities.

There could be plenty of volatility between here and there. But with a long timeframe and sensible position size, I think the potential reward makes that risk worth considering.

Motley Fool contributor Grace Alvino has positions in DroneShield. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended DroneShield. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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